THE  PRACTICAL  WORK  OF  A  BANK 


BANKERS 
PUBLISHING 

COMPANY 

m 

NEW  YORK 


THE  PRACTICAL  WORK 
OF  A  BANK 


A   TREATISE   ON   PRACTICAL   BANKING   WHICH   AIMS   TO 

SHOW  THE    FUNDAMENTAL   PRINCIPLES   OF   MONEY; 

THE  PRACTICAL  WORK  OF  A  BANK  IN  DETAIL,  AND 

PARTICULARLY,  CREDIT  IN  ITS  RELATION 

TO  BANKING  OPERATIONS 


By  WILLIAM  H.  KNIFFIN,  JR. 

Vice-President,  Bank  of  Rockville  Center,  New  York,  Author  of  "  The  Savings 

Bank  and  Its  Practical  Work,'1  "The  Easiness  Man  and  His  Bank," 

'•Commercial  Paper  and  The  Analysis  of  Credit 

Statements,"  etc. 


SIXTH  EDITION 
(REVISED) 


NKW  YORK 

THE  BANKERS  PUBLISHING  COMPANY 

1921 


Copyright  1915,  1916,  1917,  1919,  1921 

THE  BANKERS  PUBLISHING  COMPANY 

NEW  YORK 


-.   Li!). 

WG 
/60' 


TO    MY    FRIEND 

VICTOR  A.  LERSNER 

IN    APPRECIATION    OF    A    LONG    AND 
HELPFUL    FRIENDSHIP 


Fia^T  EDITION 
August,  1915 


SECOND  EDITION 
August,  1916 


THIRD  EDITION 
August,  1917 


FOURTH  EUITION 

January,  1919 


FIFTH  EDITION 
September,  1919 


SIXTH  EDITION 
February,  1921 


PREFACE 

The  methods  and  machinery  of  practical  banking  do  not  materially 
change  with  the  passing  of  the  years.  The  changes  that  take  place  from 
time  to  time  are  mechanical  rather  than  fundamental.  The  one  drastic 
innovation  of  the  past  decade  has  been  the  introduction  of  the  Numerical 
Transit  System,  which  substitutes  numbers  for  names — an  obvious  con- 
servator of  time. 

While  the  technique  of  banking  has  not  undergone  any  decided  de- 
parture from  established  principles,  the  machinery  of  banking  has,  how- 
ever, gone  through  a  process  of  evolution,  as  the  increasing  demands  of 
the  business  world  have  made  shorter  and  quicker  methods  necessary  in 
order  to  cope  with  the  added  volume  of  work  without  unduly  increasing 
the  cost.  The  adding  machine  and  the  adding  typewriter,  particularly, 
have  come  into  play  as  time  and  labor  savers  of  the  highest  usefulness, 
without  which  the  labor  cost  of  banking  would  be  much  greater  than 
the  profits  would  warrant. 

Nevertheless,  there  would  seem  to  be  room  for  a  new  work  on 
practical  banking,  dealing  with  the  subject  in  a  form  different  from 
any  which  have  heretofore  appeared;  and  this  work  is  in  no  way  intend- 
ed to  supplant,  but  rather  to  supplement,  those  which  have  gone  before, 
whose  excellence  will  for  many  years  be  recognized. 

It  has  been  the  author's  aim  to  collate  the  best  thought  of  the  past 
ten  years  relative  to  the  practical  conduct  of  a  bank,  particularly  from 
men  who  have  written  and  spoken  concerning  the  work  in  which  they 
have  had  long  experience.  Especially  is  this  true  of  the  men  of  the 
American  Institute  of  Banking,  from  whom  much  help  has  been  re- 
ceived, and  which  is  here  gratefully  acknowledged. 

It  is  difficult,  if  not  impossible,  in  a  work  of  this  kind,  to  avoid  ap- 
parent repetition,  as  the  work  is  viewed  from  different  angles;  for  the 
work  so  dovetails  that  in  describing  one  process,  or  the  work  of  one  de- 
partment, other  processes  and  departments  must  of  necessity  be  men- 
tioned, but  such  duplication  has  been  avoided  as  much  as  possible. 

It  is  hoped  the  work  will  prove  constructive  in  its  development,  con- 
cise and  correct  in  its  statements,  and  readable  withal. 

W.  H.  K.,  JB. 


vii 


abeam 


CONTENTS 

PAOB 

CHAPTER  I.     THE  THING  WE  CALL  MONEY 1 

Exchange;  barter;  trade;  demand  and  supply;  a  common  denominator 
of  values;  what  is  money;  characteristics  of  money;  paper  money;  the  evo- 
lution of  a  bank. 

CHAPTER  II.     THE  BANK  AS  A  CREDIT  MACHINE 12 

Metallic  money;  trust  the  basis  of  the  credit  system;  manufacturing 
credit;  operating  a  credit  machine;  forms  of  bank  credit;  bank-note  credit; 
certification  credit;  acceptance  credit;  the  limits  of  bank  credit;  clearing  of 
bank  credits;  international  clearings. 

CHAPTER  III.  BANKS,  BANKERS  AND  BANKING 27 

Banking  machinery  necessary;  the  private  banker;  banks  distinguished; 
banks  defined  and  classified;  the  functions  of  a  bank — deposit,  discount, 
note  issue. 

CHAPTER    IV.     THE    ORGANIZATION    AND    ADMINIS- 
TRATION OF  A  BANK . .        38 

The  men  behind  the  bank;  surplusage  of  banks;  the  charter;  directors; 
the  "one-man  bank";  the  president;  vice-president;  cashier;  "ink-spots  on 
the  ledger";  the  banking  house;  the  banking  room;  "Philip — an  Institution." 

CHAPTER      V.     DEPOSITS      AND      THE       RECEIVING 

TELLER 58 

New  York  the  deposit  center;  competition  for  bank  deposits  keen; 
opening  an  account;  the  bank  and  its  depositors;  the  pass-book;  the  re- 
ceiving teller;  duties  and  qualifications  of  the  receiving  teller;  good  money 
and  bad;  making  a  deposit;  checks  for  deposit;  endorsements;  corporation 
checks;  third  party  endorsements;  the  deposit  ticket;  right  name  should 
be  on  the  ticket;  the  depositor  should  make  the  ticket;  proving  the  ticket; 
the  machinery  of  banking;  the  teller's  records  and  proofs;  the  block  sys- 
tem; a  day  with  the  receiving  teller;  legal  tender. 

CHAPTER  VI.     THE  PAYING  TELLER,  HIS  PAYMENTS 
AND  HIS  CASH 88 

Receiving  vs.  paying  teller;  qualifications  and  essentials  of  the  paying 
teller;  the  paying  teller's  duties  and  responsibilities;  the  teller's  cash;  cash- 
ing a  check;  words  and  figures  on  checks;  identification;  crossed  checks; 
stop  payments;  the  clearings;  bearer  checks;  certification  of  checks;  pro- 
tection of  bank  checks;  ease  of  obtaining  checks  for  raising;  cashing  a 
stop  payment  check;  how  to  stamp  checks;  sample  checks — care  of;  how 
safeguarded;  how  to  protect  against  check  frauds;  educating  depositors; 
payrolls;  the  teller's  mistakes;  the  money  teller;  figuring  the  reserve;  the 
unit  system;  proverbs  of  a  paying  teller;  the  acid  test  for  coins;  liability 
on  forged  and  altered  checks. 

CHAPTER  VII.     CLEARINGS  AND  CLEARING-HOUSES..      145 

Origin  of  clearing-houses;  the  largest  check  ever  paid;  varieties  of 
clearing-houses;  clearing-house  terms  and  instruments;  getting  ready  for 
the  clearing;  the  clearing  process;  settling  the  balances;  clearing-house  set-1 
tlements;  clearing-house  activities;  clearing  for  non-members;  clearing 
country  checks;  the  weekly  report. 

CHAPTER  VIII.     COLLECTIONS  AND  THE  MESSENGER.     164 

The  messenger;  the  messenger's  valuables;  old  employees;  meeting 
men;  the  law  of  collections;  collecting  direct  from  payee  banks;  endorse- 
ments; the  machinery  of  collections;  the  note  teller;  out-of-town  collec- 
tions; coupons;  savings  bank  books, 

iz 


PAGR 

CHAPTER  IX.     LENDING  THE  BANK'S  MONEY 205 

Loans  and  discounts  distinguished;  loans  and  credit;  deposits  often 
loans;  liquid  loans;  applying  for  a  loan;  collateral  loans;  listed  and  un- 
listed securities;  the  margin;  watching  the  ticker;  "good  delivery";  form 
of  collateral  note;  time  loans;  bookkeeping  of  the  loan;  loan  register;  ma- 
turity record;  the  borrower's  liability;  substitutions;  when  the  due  date 
arrives;  unearned  discount;  accounts  receivable  as  collateral;  interest; 
payment  of  call  loans;  loans  for  the  bank's  correspondents;  warehouse 
loans;  bills  of  lading. 

CHAPTER      X.     THE      BANK      AS      AN      ACCOUNTING 
MACHINE   2*9 

Presentation  of  accounting  facts;  the  accounts  of  a  bank;  banks  agree 
in  essentials;  corporate  records;  stock  certificate  book;  stock  subscrip- 
tions; transfer  of  stock;  dividends;  the  books  of  record;  the  journal;  the 
equation  of  accountancy;  the  statement  of  condition  and  its  analysis; 
assets;  liabilities;  the  bookkeeping  force;  the  application  for  employment; 
available  men;  the  new  recruit;  the  art  of  handling  men;  the  chief  clerk; 
days  off;  employees'  pensions;  purpose  of  the  records;  controlling  accounts; 
the  general  ledger;  the  accounts  with  depositors;  the  Boston  Ledger;  the 
average  book;  accounts  stated;  the  statement  system;  opening  a  new  ledg- 
er; balancing  pass-books;  stationery  and  supplies;  expenses;  petty  cash; 
changes  in  accounts;  care  of  tickets  and  vouchers;  keeping  the  bank's  books 
by  machinery;  bank  statements  by  machinery. 

CHAPTER  XI.     CHECKS  AND  THEIR  COLLECTION 319 

Checks  circulating  currency;  growth  of  the  use  of  bank  checks;  defects 
in  the  present  system  of  finance;  checks  defined;  checks  classified;  com- 
pensating balances;  the  country  banker  and  his  city  correspondent;  the  jour- 
ney of  a  bank  check;  the  transit  department;  collection  of  bank  checks; 
exchange  charges;  the  numerical  transit  system;  the  operation  of  the  tran- 
sit department. 

CHAPTER  XII.     BANK  EXAMINATIONS  AND  AUDITS. . .     349 

The  right  to  examine,  police  power;  classes  of  bank  examinations;  ex- 
aminations by  directors;  what  the  examiner  should  know;  the  psychology 
of  errors;  how  to  make  an  examination;  cash  and  exchanges,  verification 
of;  collateral  loans;  unsecured  loans;  government  moneys  and  securities; 
amounts  due  from  banks;  verifying  the  liabilities;  clearing-house  examina- 
tions; benefits  of  clearing-house  examinations;  little  points  for  the  exam- 
iner; various  matters  concerning  which  the  Comptroller  requires  detailed 
information. 

CHAPTER  XIII.     ESSENTIALS  IN  GRANTING  CREDIT. .     871 

The  nature  and  functions  of  credit;  credit  in  economics;  credit  in 
law;  credit  in  business;  the  field  of  credit  broad;  credit  a  science;  credit 
is  old;  credit  a  fine  piece  of  mechanism;  credit  a  transfer;  credit  a  law- 
ful right;  credit  is  capital;  credit  an  asset;  credit  is  reputation;  credit  is 
willingness;  credit  is  ability;  credit  is  resources;  credit  is  confidence;  the 
psychology  of  credit;  mental  processes;  all  men  not  honest;  two  men  bet- 
ter than  one;  past  performances;  property  and  property  rights;  collateral 
loans  not  essentially  credit  transactions. 

PERSONAL  CEEDIT — Personal  credit  distinguished;  the  granting  of  per- 
sonal credit;  references;  personal  credit  ratings;  individual  vs.  mercantile 
credit;  the  charge  account;  the  growth  of  personal  credit;  period  of  per- 
sonal credit;  losses  in  personal  credit;  personal  credit  the  foundation  of 
the  credit  system. 

MERCANTILE  CEEDIT — Benefits  of  mercantile  credit;  bank  credit  rests 
upon  mercantile  credit;  bank  credit  should  facilitate  exchanges;  channels 
,  of  commercial  credit;  buying  and  selling  without  cash;  changing  conditions 
in  mercantile  credit;  mercantile  credit  terms;  instruments  in  mercantile 
credit;  books  accounts  as  security;  assigned  accounts  a  menace;  dating 
ahead;  the  mercantile  credit  field;  enormous  cost  of  retail  selling;  frauds 
in  mercantile  credit;  the  mercantile  statement;  how  to  figure  the  turnover; 


FAGB 

granting  mercantile  credit;  why  men  fail;  development  of  the  retail  store; 
profits;  losses;  business  risks;  the  wholesaler  and  the  retailer;  standards 
of  credit;  the  credit  department;  the  bank  and  its  correspondents;  credit 
information;  how  credit  information  is  kept;  classification  of  risks;  the 
credit  man;  losses  expected;  the  essentials  of  a  good  loan;  elements  of 
sound  credit;  the  man — the  moral  risk;  his  methods — the  business  risk;  his 
resources — the  property  risk;  the  statement — the  borrower's  estimate  of 
himself;  standardized  forms  of  credit  statements;  the  statement  must  be 
recent;  false  statements;  statement  reciprocal  in  value. 

ANALYZING  A  STATEMENT  OF  CONDITION — Two  to  one;  cash;  bills  re- 
ceivable; accounts  receivable;  merchandise;  inventory;  trust  receipts;  cap- 
ital assets;  machinery  and  fixtures;  liabilities;  accounts  payable;  ratio  of 
plant  to  capital;  net  worth;  depreciation;  bank  connections;  liabilities  to 
capital;  accrued  assets  and  liabilities;  good  will;  integrity  of  organization. 

THE  PASSING  OF  A  LOAN — Comment  by  the  credit  man;  what  the  credit 
man  wants  to  know;  commercial  paper;  commercial  paper,  liquid  re- 
serves; the  cash  discount  system;  what  it  costs  the  retailer  not  to  take  his 
discounts;  commercial  paper  and  the  Federal  Reserve  Banks;  two-name 
paper;  the  discount  market;  the  commercial  paper  broker;  buying  paper  on 
option ;  answering  credit  inquiries ;  deductions  of  a  credit  man  in  analyzing 
business  statements;  qualities  of  a  credit  man;  the  credit  man's  tools;  the 
deductive  process;  the  three  C's  of  credit;  essentials  in  a  credit  statement; 
four  actual  statements  analyzed  and  commented  upon. 

CHAPTER  XIV.     THE  BANK  MAN  IN  THE  MAKING 603 

The  banker  in  fiction;  the  bank  man's  wage;  two  schools  of  banking; 
the  country  bank  and  the  city  bank;  proper  training  essential  to  success; 
pivotal  points  in  a  bank  man's  life;  learning  by  doing;  every  man  can  bet- 
ter himself;  a  definite  aim;  taking  himself  for  granted;  definite  methods; 
what  is  education?;  experience  a  dear  teacher;  education  a  definite  process; 
more  bread  and  butter;  the  bank  man's  twenty-four  hours;  things  the  bank- 
er must  know. 

CHAPTER  XV.     THE  MORNING  MAIL 618 

Handling  the  mail  in  a  large  city  bank;  outgoing  mail;  improved 
method  of  folding  letters;  record  of  stamps  used;  filing  correspondence;  a 
practical  filing  system. 

CHAPTER    XVI.     COST    ACCOUNTING    AND    ANALYSIS 

OF  ACCOUNTS   637 

Bank  profits;  profitable  and  unprofitable  accounts;  the  bank's  services 
to  the  depositor;  the  quality  of  the  account — its  influence;  penalizing  small 
balances;  cost  accounting  in  banking;  administrative  costs;  exchange 
charges — interest;  the  earning  power  of  money;  special  costs;  three  theories 
of  apportionment;  units  of  cost;  a  cost  system  based  upon  expenses; 
analyzing  the  expense  account;  cost  of  handling  an  item. 

CHAPTER  XVII.     FOREIGN  AND  DOMESTIC  EXCHANGE.     669 

Settling  debts  without  money;  origin  of   foreign  debts;   the  demand 

for  foreign  bills;  forms  of  bills  of  exchange;  how  exchange  is  quoted;  the 

basis  of  exchange;  causes  that  effect  exchange  rates;  imports;  exports; 

profits  in  foreign  exchange;  cables;  domestic  exchange. 

INDEX    .  691 


CHAPTER  I. 

THE  THING  WE  CALL  MONEY 

At  the  beginning  of  the  economic  process  each  man  got 
from  Nature  the  things  he  needed  to  satisfy  his  simple  wants. 
He  could  maintain  himself  and  family  by  his  fishing  and 
hunting  exploits ;  but  the  individualistic  life  led  by  Robinson 
Crusoe  is  possible  only  in  fiction,  and  mankind  soon  discov- 
ered that  community  life  is  necessary  both  for  protection  and 
for  companionship.  It  soon  developed  that  the  various  mem- 
bers of  the  tribe  were  adapted  to  various  pursuits.  Some 
would  be  proficient  hunters  or  fishermen,  while  others  would 
be  adept  at  manufacturing  the  simple  tools  and  implements 
needed  for  the  tribe's  existence.  Therefore,  one  would  trade 
with  the  other  on  such  basis  as  was  mutually  agreed.  This 
is,  in  its  primitive  form,  what  the  economist  calls  barter,  or  the 
exchange  of  article  for  article,  and  in  its  world-wide  devel- 
opment is  commerce.  Trade  is  barter,  and  barter  is  trade. 

As  soon  as  men  began  to  trade  with  one  another  the  first 
difficulty  they  encountered  was  to  find  a  buyer  and  a  seller, 
both  wanting  the  article  the  other  had  to  trade.  The  maker 
of  baskets  had  to  find  a  hunter  or  a  fisherman  who  wanted 
baskets,  and,  on  the  other  hand,  the  hunter  had  to  find  a 
basket  maker  who  wanted  meat,  and  not  only  desired  the  arti- 
cle, but  in  such  quantity  as  would  make  a  fair  exchange  pos- 
sible. This  is  the  difficulty  in  all  exchanges  of  goods  for 
goods. 

It  soon  became  apparent  that  if  some  article  of  universal 
desirability  could  be  found,  by  which  other  articles  could  be 
measured,  and  which  everybody  would  receive  in  exchange 
for  the  product  of  their  labor,  not  only  could  a  fair  exchange 
be  effected,  but  the  exchange  process  could  be  greatly  facili- 
tated ;  and  so  each  tribe  or  nation  selected  for  itself  some  arti- 
cle or  commodity  which  was  universally  prized  by  its  own 
people,  and  this  became  the  medium  of  exchange  or  the  yard- 

ilt  must  be  borne  in  mind,  however,  that  all  trade  is  barter,  even  when 
the  precious  metals  are  employed  as  intermediaries — the  latter  being  articles  of 
barter  also,  and  possessing  the  same  value  as  the  things  for  which  they  are 
exchanged.  The  whole  science  of  money  hinges  on  this  fact.  White,  "Money  and 
Banking,"  p.  10. 


2  THE   PRACTICAL   WORK  OF   A   BANK 

stick  by  which  exchanges  were  measured.  The  article  might 
not  have  answered  our  present  idea  of  what  money  should  be, 
and  it  may  have  lacked  the  essential  qualities  of  money  as  we 
shall  presently  discuss  them,  but  in  a  crude  way  it  answered 
the  purpose  of  money,  for  it  was  a  measure  of  value  and  the 
basis  of  exchange. 

DEBTS  SETTLED  BY  EXCHANGING  COMMODITIES 

Communities  differ  and  nature's  products  are  not  evenly 
distributed.  One  community  can  best  produce  one  thing; 
another,  another.  One  community  can  produce  wheat  and 
the  other  grind  it  into  flour.  Where  wheat  is  in  abundance, 
water  power  may  be  scarce.  And  as  one  section  produces 
one  thing  and  another  produces  another,  community  debts 
are  settled  by  an  exchange  of  goods  for  goods,  the  same  as 
between  individuals.  Thus,  New  England  buys  wheat  from 
Dakota  and  gives  shoes.  For  our  cotton  England  gives  us 
manufactured  goods.  For  the  debts  we  owe  her  for  ship- 
ping, freights,  insurance  and  interest  on  our  debt  to  her,  we 
send,  not  gold,  but  wheat  and  cotton.  We  pay,  as  a  rule, 
not  in  money,  but  in  goods. 
j  _ 

DEMAND  AND  SUPPLY 

The  amount  of  product  one  man  will  give  for  a  certain 
amount  of  another  depends  upon  the  amount  he  has  at  hand, 
the  labor  involved  in  producing,2  and  other  factors  entering 
into  the  scheme  of  production.  That  which  is  scarce  will 
have  a  higher  exchange  value  than  that  which  is  plentiful. 
This  condition  tends  to  correct  itself  by  labor  going  into 
those  channels  where  scarcity  exists,  and  producing  enough 
to  effect  an  equilibrium.  Thus,  if  cattle  are  scarce  and  meat 
high,  unless  by  some  operation  such  as  a  meat  trust,  whereby 
prices  can  be  maintained  by  artificial  means  (although  not 
for  long)  men  will  engage  in  raising  meat  animals  until 
the  supply  balances  the  demand  and  prices  fall.  Only  as  the 
consumptive  power  of  the  people  increases  faster  than  the 
productive  power  can  high  prices  in  food  products  long  exist. 

As  civilization  has  developed,  men's  wants  have  become 

aMoney  is  always  the  product  of  labor.  Nobody  could  give  that  which 
has  cost  him  labor  in  exchange  for  something  which  he  could  obtain  without 
labor.  White,  p.  9. 


THE  THING  WE  CALL  MONEY  • 

more  complex,  so  that  as  wants  have  increased,  ways  and 
means  have  been  found  to  satisfy  them;  and  little  by  little 
through  the  centuries  we  have  biiilt  up  the  present  world 
structure  of  commerce  arid  industry,  the  ultimate  end  and 
aim  of  which  is  to  satisfy  the  three  fundamental  wants  of 
the  human  race — food,  clothing  and  shelter — with  all  the 
ramifications  that  result  from  the  satisfaction  and  gratifica- 
tion of  the  five  senses. 

And  as  time  went  on,  increased  facilities  for  the  produc- 
tion of  goods  have  been  devised,  labor  has  been  divided  and 
sub-divided,  each  doing  best  that  for  which  he  is  most  fit  by 
training,  education  and  temperament,  so  that  out  of  it  all 
has  arisen  what  we  call  "exchange,"  meaning  the  giving  of 
one  thing  for  another,  whether  it  be  money  or  goods  or 
services,  or  a  combination  of  these  elements. 

EARLY  RECOLLECTIONS 

Very  early  in  life  we  came  to  realize  that  there  was  a  differ- 
ence between  the  things  which  belonged  to  us  and  the  things 
which  belonged  to  others.  We  were  jealous  of  our  toys.  We 
were  impressed  with  the  idea  that  over  the  things  which  were 
ours  we  were  allowed  to  exercise  dominion;  we  had  special 
rights.  We  were  early  taught  to  respect  the  rights  of 
others.  We  learned  that  the  things  that  were  displayed  in 
the  candy  store  were  not  ours  and  could  not  be  had  for  ask- 
ing, but  could  only  be  obtained  by  giving  something  in 
exchange.  Just  what  the  penny  we  had  to  spend  was  in  the 
economic  scheme — what  the  storekeeper  did  with  it — we  did 
not  know  or  care.  And  whether  we  were  receiving  value  in 
return,  we  did  not  have  much  thought ;  but  we  did  know  that 
we  could  exchange  the  penny  for  something  that  appealed 
to  us. 

The  first  thing  we  learned,  therefore,  before  acquiring 
possession  of  the  property  of  others  was  that  permission  of 
the  owner  must  be  obtained,  or  something  given  in  exchange. 
If  the  permission  was  without  an  exchange  it  became  a  gift 
and  not  an  exchange.  We  might,  however,  get  possession 
by  promising  to  give  something,  sometime,  and  thereby  ob- 
tain the  article  on  a  deferred  payment,  and  thus  obtain  it  on 
credit.  We  have,  therefore,  unconsciously  as  children  used 
the  two  fundamentals  of  banking — money  and  credit. 


4  THE   PRACTICAL  WORK  OF   A   BANK 

A  COMMON  DENOMINATOR  OF  VALUES 

Before  any  exchange  of  goods  can  be  made,  not  only 
must  consent  be  given  by  both  parties,  but  there  must  be  an 
agreement  as  to  what  shall  constitute  the  basis  of  the  trade 
—what  shall  measure  the  value.  The  consent  must  be  to  the 
same  thing.  It  matters  not,  so  far  as  the  fairness  goes,  if 
each  were  to  agree  that  thirty  inches  are  a  yard,  neither 
would  be  the  loser,  for  in  fixing  the  value  this  would  be 
considered. 

As  labor  became  divided — each  man  to  his  trade  and  all 
trading  together,  exchanging  goods  for  goods — it  was  found 
that  a  common  denominator  of  values  was  necessary.  It 
was  needful  that  the  man  who  made  a  pair  of  shoes  should 
have  something  by  which  to  measure  the  labor  and  material 
involved  therein,  so  that  he  might  exchange  his  labor  as  rep- 
resented thereby  for  other  things.  The  shoes  must  represent 
so  many  units3 

We  did  not  progress  very  far  in  life  before  we  discovered 
that  there  was  a  common  thing  that  would  be  accepted  by 
all  men  as  the  basis  of  all  exchanges  and  for  all  things, 
namely,  money.  It  might  be  in  the  form  of  paper,  or  it 
might  be  metallic  money,  but  it  was  money.  And  we  fur- 
ther learned  that  if  we  did  not  want  to  exchange  the  money 
we  had  at  the  time  for  some  other  article,  we  could  keep  it 
and  use  it  at  a  future  time,  and  it  would  be  as  good  then  as 
at  first;  and  thus  money  came  to  have  power  in  reserve — 
stored  energy — as  well  as  exchange  power.  We  could  save 
it  as  well  as  trade  with  it.  Moreover,  we  could  put  it  in  a 

sit  is  plain  that  in  the  first  society  (that  is,  in  the  household)  there  was 
no  such  thing  as  barter,  but  that  it  took  place  when  the  community  became  en- 
larged; for  the  former  had  all  things  in  common,  while  the  latter,  being  sepa- 
rated, must  exchange  with  each  other  according  to  their  needs,  just  as  many 
barbarous  tribes  now  subsist  by  barter;  for  these  merely  exchange  one  useful 
thing  for  another.  This  kind  of  trading  is  not  contrary  to  nature,  nor  does  it 
resemble  gainful  occupation,  being  merely  the  complement  of  one's  natural  in- 
dependence. From  this,  nevertheless,  it  came  about  logically,  that  as  the  machin- 
ery for  bringing  in  what  was  wanted,  and  sending  out  the  surplus,  was  incon- 
venient, the  use  of  money  was  devised  as  a  matter  of  necessity,  for  not  all 
necessities  of  life  are  easy  of  carriage.  Therefore,  to  effect  their  exchanges  men 
contrived  something  to  give  and  take  among  themselves,  which,  being  valuable 
in  itself,  had  an  advantage  of  being  easily  passed  from  hand  to  hand  for  the 
needs  of  life — such  as  iron  or  silver  or  something  else  of  that  kind,  of  which 
they  first  determined  merely  the  size  and  weight,  but  eventually  put  a  stamp  on 
it  in  order  to  save  the  trouble  of  weighing,  for  the  stamp  was  placed  there  as 
a  sign  of  its  value.  Aristotle,  Politics,  p.  9. 


THE  THING  WE  CALL  MONEY  5 

bank  and  get  a  pass-book  or  a  certificate  of  deposit  for  it, 
and  when  we  wanted  it  the  banker  would  give  us,  not  the 
identical  money  we  left  with  him,  but  its  equivalent,  and 
thus  we  discovered  that  money  would  not  only  exchange  for 
goods  and  keep  its  power  to  exchange  for  goods,  but  could 
be  exchanged  for  a  credit.  And  it  may  be  we  found  that  if 
we  left  it  for  a  length  of  time,  the  banker  would 
give  us  a  little  more  than  we  deposited,  and  money 
came  to  have  an  earning  power;  that  is,  the  banker  paid  us 
for  the  privilege  of  having  our  money  to  loan  to  other  men 
who  wanted  to  use  it  and  would  pay  for  its  use,  and  thus  we 
became  acquainted  with  the  principle,  if  not  the  theory,  of 
interest  and  the  uses  of  money. 

A  MEDIUM  OF  EXCHANGE 

It  was  not  long  after  men  began  trading  that  they  real- 
ized that  they  needed  a  common  medium  of  exchange4  and 
a  common  denominator  of  prices.  And  by  common  con- 
sent this  medium  of  exchange  is  called  money.  "When  I 
save  enough  money,  I  am  going  into  business,"  says  the  clerk; 
meaning  that  when  he  gets  enough  of  one  thing  to  exchange 
for  other  things,  he  will  give  the  other  things  in  exchange  for 
the  thing  he  first  had  and,  therefore,  do  a  business  as  a  trader, 
using  money  as  a  medium  of  exchange  and  a  basis  for  the 
exchange  values.  He  buys  new  goods  only  when  he  has  the 
money  in  hand  or  in  prospect  to  exchange  for  them.  The 
contractor  on  the  sewer  system  will  exchange  his  money, 
saved  it  may  be  by  working  on  a  sewer  job  himself,  for  the 
labor  of  the  men  in  the  trench,  who  will  exchange  that  money 
for  things  to  eat ;  and  the  merchant  will  exchange  the  money 
for  more  goods  to  exchange  again  for  money. 

The  merchant  looks  in  his  till  and  finds  it  empty.  "I 
must  collect  some  money,"  says  he;  meaning  that  he  must 
turn  his  book  accounts  into  money  to  exchange  for  goods. 

4Men  discover  the  need  of  a  common  medium  of  exchange  as  soon  as  society 
emerges  from  the  patriarchial  state,  where  each  group  of  persons  is  sufficient 
unto  itself.  They  learn  by  experience  that  one  who  wants  wheat  and  has  only 
skins  to  exchange  for  it,  must  meet  someone  who  has  wheat  and  wants  skins, 
and  that  much  time  and  labor  may  be  lost  before  the  two  can  find  each  other. 
Then  more  time  may  be  lost  before  they  can  agree  upon  the  ratio  of  exchange 
at  which  the  two  articles  should  be  exchanged  for  each  other.  The  few  and 
simple  words  with  which  Aristotle  has  treated  this  subject  cannot  be  bettered. 
Whole  tomes  have  been  written  to  say  the  same  things  and  have  ended  without 
saying  them.  White,  p.  9. 


6  THE   PRACTICAL  WORK  OF   A   BANK 

Whether  it  is  a  Wall  Street  broker  buying  stocks  and 
bonds  by  the  million,  or  the  driver  of  a  truck,  or  the  sales- 
girl in  a  department  store,  or  the  grocer  or  the  butcher,  or 
the  man  who  digs  in  the  trench,  the  common  end  of  all  is  to 
get  the  thing  we  call  money,  in  order  that  they  may  ex- 
change it  for  the  things  they  want,  knowing  that  as  soon  as 
they  get  money  they  can  satisfy  their  wants,  however  simple 
or  complex. 

WHAT  is  MONEY? 

Money  is  a  commodity  which  mankind  voluntarily  ac- 
cepts in  exchange  for  all  other  commodities  and  services  a 
Any  commodity  to  answer  as  money  must  have  certain  qual- 
ities. It  must  exist  in  such  quantities  as  to  permit  of  its 
being  obtained  without  great  hardship,  although  not  without 
some  labor  and  hardship,  so  that  its  rarity  will  make  it  of 
value ;  for  if  it  be  free  for  the  taking  no  one  will  give  in  ex- 
change for  it  anything  of  value.  A  people  cannot  use  as 
money  the  thing  they  do  not  possess  either  substantively  or 
potentially.  It  must  be  possible  of  obtainment.  Whatever 
value  to  the  individual  it  may  have,  it  must  have  a  value  to 
the  community  as  a  whole,  or  it  will  not  answer  as  money. 
The  things  that  have,  the  world  over,  been  used  as  money- 
hides,  shells,  tobacco,  etc. — have  all  had  a  community  value; 
and  gold  and  silver  have  for  centuries  had  this  quality  for 
reasons  hereafter  mentioned. 

A  commodity  to  answer  as  money  should  be  ductile ;  that 
is,  it  must  be  capable  of  being  smelted,  purified  and  "coined" 
by  being  turned  into  discs,  stamped  with  the  insignia  of  value, 
and,  therefore,  readily  distinguishable  as  money  and  the 
value  certain.  It  must  permit  of  being  divided  into  parts, 
each  of  which  is  equal  to  every  other  part,  and  the  sum  of 
the  parts  equal  to  the  whole. 

There  may  be  fifty  fleeces  of  sheep,  all  subject  to  cleans- 
ing and,  therefore,  pure  from  dross,  but  no  two  would  be 
alike  in  weight  or  fineness,  and  certainly  not  suitable  as 
money.  A  skin  might  have  answered  as  money  for  primi- 
tive man,  but  would  be  totally  inadequate  for  present-day 
needs.  And  to  attempt  to  exchange  an  article  of  smaller  value 

B  White,  p.  9. 


THE  THING  WE  CALL  MONEY  7 

for  a  skin  would  be  impossible,  for  to  cut  the  skin  might  ruin 
it,  and  the  sum  of  the  parts  would  not  be  equal  to  the  whole. 
It  becomes  necessary,  therefore,  to  find  something  that  can 
be  divided  into  minute  parts,  coined,  and  of  sufficient  hard- 
ness to  take  a  stamp  and  hold  it,  and  to  represent  in  small 
compass  much  value — that  is,  exchangeability.  It  must  be 
easily  carried  about,  and,  therefore,  small  in  its  dimensions. 

The  things  that  have  been  used  as  money  include  skins, 
dried  meat,  fish,  tobacco,  shells,  cattle,  silk,  cocoanut  oil, 
wheat,  rice,  corn,  iron,  copper,  nickel,  silver  and  gold.  What- 
ever will  be  generally  acceptable  to  the  people  will  answer 
in  a  limited  sense  for  money,  but  not  in  its  widest  sense,  nor 
over  a  wide  territory.  Moreover,  not  all  these  articles  have 
lasting  character.  They  will  not  stand  the  elements,  nor  are 
they  divisible  as  is  metal. 

All  metals  have  been  used  at  one  time  or  another,  but  gold 
and  silver  are  now  the  only  basic  metals,  copper  and  nickel 
being  used  only  in  subsidiary  coin. 

The  story  is  told  of  a  Connecticut  collector  of  taxes  who 
received  his  taxes  in  peas — a  current  article  used  as  money; 
but  in  rowing  his  load  of  "money"  down  the  Connecticut 
River,  a  rain  came  up  and  his  "tax  money"  spoiled. 

While  all  the  articles  mentioned  as  having  been  used  as 
money  answered  for  a  time  and  to  a  limited  degree,  they  had 
many  disadvantages  that  were  apparent  even  to  primitive 
peoples,  and  so  by  a  process  of  evolution,  gold  and  silver 
have  come  to  be  used  the  world  over  as  the  money  of  the 
nations,6  substitutes  in  the  form  of  paper,  and  credit  instru- 
ments in  the  form  of  bank  notes,  taking  their  places  only 
that  the  supply  might  be  safeguarded,  the  risk  of  loss  re- 
duced, and  the  abrasion  and  the  annoyance  of  transferring 
the  heavy  article  avoided. 

The  physical  difficulties  in  using  metallic  money  will  be 
seen  any  day  around  Wall  Street  and  the  Sub-Treasury, 
where  the  shipping  of  gold  is  as  interesting  a  process  as  the 
unloading  of  a  ton  of  coal.  In  the  call  for  the  first  pay- 
ment on  the  part  of  member  banks  to  the  funds  of  the 
Federal  Reserve  Banks,  it  was  suggested  that  gold  certifi- 


«AI1  writers  are  agreed  that  the  five  requisites  to  a  good  kind  of  money  are: 
Portability,  uniformity,  durability,  cognizability,  and  stability  of  value.  Long 
experience  has  taught  mankind  that  these  qualities  are  best  embodied  in  the 
metal,  gold.  White,  p.  12. 


8  THE   PRACTICAL  WORK  OF   A   BANK 

cates  be  sent  and  not  the  metal,  in  order  to  obviate  the  physi- 
cal labor  of  counting  the  coin. 

The  desire  on  the  part  of  men  to  adorn  themselves  has 
had  much  to  do  with  the  use  of  silver  and  gold  as  money, 
and  these  metals  have  a  commodity  value  by  reason  of  their 
uses  in  the  trades,  and  this  feature  has  added  much  to  their 
worth.  Whatever  man  uses  for  adornment  he  can  use  for 
money,  if  it  be  generally  desirable,  but  the  trouble  with  such 
a  thing  as  a  watch,  even  though  gold,  is  readily  apparent. 

The  funds  which  pass  current  in  a  community  and 
answer  as  the  common  denominator  of  values  as  men  trade 
with  men  are  two:  (a)  Money  funds,  being  accumulations  of 
gold,  silver,  bank  notes,  gold  and  silver  certificates,  and 
other  forms  of  paper  money,  these  passing  from  hand  to 
hand  at  their  face  value  and  freely  accepted  by  all;  and  (b) 
credit  funds,  such  as  checks,  bank  certificates  of  deposit, 
bills  of  exchange  and  promissory  notes. 

The  bank  is  the  accumulator  of  the  money  funds  of  the 
community  and  the  clearing  house  for  the  credit  funds.  The 
credit  funds  in  their  net  balances  are  settled  by  money  funds 
and  one  is  as  important  as  the  other. 

PAPER  MONEY 

Metal  in  itself  has  a  value.  It  has  many  uses.  It  is 
scarce.  It  involves  labor,  risk.  Although  the  one  thing 
to  be  desired  of  all  material  things,  it  is  cumbersome  and  un- 
satisfactory as  a  medium  of  exchange. 

We  are  now  speaking  of  real  money,  not  of  promises  to 
pay  money.  All  of  our  circulating  media  and  all  of  our 
smaller  coins  are,  either  directly  or  indirectly,  promises  to 
pay  money.  In  paper  money  the  promise  is  stamped  upon  it. 
In  metallic  money  it  is  merely  expressed  in  the  laws.  The 
difference  between  real  money  and  a  promise  to  pay  money  is 
the  same  as  between  a  meal  and  a  meal  ticket — or  between  a 
trunk  and  a  trunk  check.7 

Metallic  money  may  have  a  good  substitute.  As  long  as 
people  know  they  can  get  the  metallic  money,  they  will  be 
satisfied  with  a  representative.  They  must,  however,  have 
confidence  that  back  of  the  representative  money  there  is 

T  White,  p.  1. 


THE  THING  WE  CALL  MONEY  9 

real  money  that  may  be  had  upon  demand;  and  the  faith 
that  this  is  so  is  the  basis  of  all  monetary  systems.  It  is  not 
needful  that  for  every  dollar  of  paper  money  there  shall  be 
a  gold  dollar,  for  the  holders  of  paper  dollars  will  not  all 
want  gold  dollars  at  the  same  time.  Therefore,  on  the  same 
principle  that  all  the  depositors  in  a  bank  will  not  want  their 
money  at  the  same  time,  paper  money  may  be  issued  on  the 
theory  that  all  holders  of  these  promises  to  pay  will  not  pre- 
sent them  at  the  same  time.  Thus  our  Government  agrees 
to  pay  to  any  holder  of  a  greenback  the  equivalent  in  gold; 
but  against  $346,000,000  of  greenbacks  it  holds  but  $150,- 
000,000  of  gold.  And  this  has,  as  a  rule,  proven  sufficient. 
Such  paper  money — currency — is  generally  issued  by  a 
large  bank  that  is  empowered  to  do  so  by  law,  or  individual 
banks  under  governmental  supervision.  In  England  the 
Bank  of  England  issues  practically  all  notes,  these  being  es- 
sentially gold  certificates,  it  being  the  policy  of  the  Bank  to 
have  a  pound  sterling  in  gold  for  each  pound  note  issued, 
there  being  also  a  small  amount  of  paper  money  based  on 
Government  securities.  In  France,  the  Bank  of  France 
issues  the  notes,  and  in  Germany,  the  Reichsbank.  In  this 
country  the  note-issue  privilege  is  restricted  to  the  national 
banks  and  to  the  Federal  Reserve  Banks.  In  order  that 
these  notes  may  pass  current,  be  above  suspicion,  and  freely 
accepted  by  the  people,  the  underlying  requirement  is  that 
there  shall  be  no  doubt  about  the  ability  of  the  issuing 
institution  to  pay  real  money  (gold)  upon  demand. 

THE  EVOLUTION  or  A  BANK 

The  evolutionary  process  already  referred  to  may  be 
seen  the  more  easily  by  using  a  simple  illustration,  which 
begins  with  barter  and  exchange  and  ends  in  a  bank. 

Let  us  suppose  that  a  blacksmith  holds  out  to  the  people 
of  his  community  the  offer  that  he  will  shoe  horses  and  take 
in  exchange  for  each  shoe  a  dozen  eggs.  He  has  shoes  to 
sell  (barter)  for  eggs.  The  farmers  have  eggs  to  sell 
(exchange)  for  horseshoes.  Therefore,  he  works  on  that 
proposition.  But  in  the  course  of  time  he  has  a  large  sup- 
ply of  eggs  and  cannot  use  them  all.  He  makes  it  known 
that  he  will  exchange  eggs  for  meat,  potatoes,  coffee,  etc., 
and  thus  supplies  the  wants  of  his  family  by  trading  the 


10        THE  PRACTICAL  WORK  OF  A  BANK 

eggs  which  he  gets  for  shoeing  horses,  for  other  things.  Bj 
and  by  he  has  a  large  and  varied  assortment  of  things  foi 
which  he  has  traded  and  cannot  use.  He  is  "stocked  up."  He 
then  ponders  the  question  and  decides  upon  a  new  move 
He  concludes  that  trading  is  not  satisfactory,  because  there 
is  no  unit  of  value.  He  cannot  exchange  a  beef  for  eggs: 
for  it  would  require  too  many  to  make  the  trade  fair.  He 
finds  eggs  breakable  and  hard  to  keep.  Therefore,  he  hits 
upon  a  new  device.  He  takes  a  lot  of  horseshoe  nails  and 
stamps  his  initials  upon  them,  and  in  return  for  various  com- 
modities gives  his  tokens  of  value — so  many  nails  for  an 
egg,  a  peck  of  potatoes,  etc.  These  he  agrees  to  take  back 
from  anyone  in  exchange  for  goods  or  services.  He  will 
give  three  eggs  for  three  nails.  Or,  if  he  takes  eggs  for 
flour,  shoes,  etc.,  and  there  is  a  balance  that  the  other  party 
does  not  wish  to  trade  out,  he  simply  hands  him  the  horse- 
shoe nails,  good  for  commodities  when  presented  by  anyone. 
We  thus  have  token  money.  The  blacksmith's  nails  would 
be  good  only  where  he  is  known  and  trusted.  They  could 
not  circulate  far  from  home.  They  are  local  money  only. 

Let  us  suppose  that  he  adopts  a  higher  standard  of  value 
— copper  discs  instead  of  iron  nails;  then  silver  discs,  more 
carefully  made;  then  gold  coins  with  his  monogram.  Each 
of  better  metal,  more  lasting  and  more  scarce.  In  the  course 
of  time  these,  too,  become  inconvenient  to  carry,  and  he 
issues  instead  paper  certificates,  agreeing  to  give  metallic 
discs  in  return  for  the  paper,  which  answers  the  purposes 
fully  so  long  as  no  doubt  exists  as  to  the  blacksmith-banker 
being  able  to  make  good  his  promises. 

To  carry  on  the  simile,  suppose  further  that  a  farmer 
wants  to  buy  something  the  blacksmith  has  not  on  hand. 
The  farmer  gives  him  a  written  promise  that  he  will  re- 
turn ten  nails  at  the  end  of  the  month  if  the  blacksmith  will 
loan  him  eight  nails  for  that  time.  The  blacksmith  has  made 
a  loan.  Another  farmer  brings  in  a  load  of  produce.  He 
does  not  want  nails,  he  may  lose  them;  they  are  heavy.  He 
prefers  to  trust  the  blacksmith  with  his  produce  and  asks 
simply  that  he  get  a  receipt.  The  blacksmith,  therefore, 
opens  a  book  account  with  the  farmer,  gives  him  a  receipt, 
and  credits  him  with  the  amount  agreed  upon,  subject  to  the 
latter's  order.  He  can  come  in  person  and  demand  the  re- 
turn of  the  amount  due  him,  or  he  can  transfer  his 


THE  THING  WE  CALL  MONEY  11 

right  to  another.  From  time  to  time  he  gives  orders  to  his 
neighbors  to  go  to  the  blacksmith  and  get  nails  on  his  ac- 
count. He  has  thus  opened  a  deposit  and  checking  account. 

Suppose  two  farmers  have  traded  together  and  settled 
the  debt,  one  by  giving  the  other  his  promise  to  pay  at  a 
certain  time,  in  nails  of  the  horseshoer.  The  seller  wants  the 
tokens  to  use  for  other  purposes.  He,  therefore,  takes  his 
neighbor's  promise  to  pay,  to  the  blacksmith  and  the  latter 
buys  (discounts)  it,  charging  him  for  the  accommodation. 
He  has  thus  made  a  discount.  And  so  we  have  a  "bank," 
loaning,  discounting  and  receiving  deposits.  And  many  a 
prosperous  bank  to-day  is  the  outgrowth  of  just  such  a  sim- 
ple process,  varied,  of  course,  as  conditions  vary,  but  funda- 
mentally the  same.  Traders  become  merchants;  merchants, 
bankers;  and  bankers,  banks. 

If  we  apply  the  same  reasoning  to  a  higher  realm  of  ac- 
tivity and  instead  of  the  blacksmith  we  have  a  number  of 
men — a  corporation — authorized  by  law  to  issue  paper 
money,  to  loan  money,  open  checking  accounts,  etc.,  who  as 
evidence  of  good  faith  have  invested  their  own  money  in  the 
enterprise,  we  have  a  bank.  If  instead  of  the  horseshoe 
nails,  we  have  finely  coined  gold  and  silver,  carefully  made 
to  indicate  the  exact  weight  and  quality,  we  have  govern- 
ment metallic  money.  If,  instead  of  the  blacksmith's  prom- 
ise to  take  in  exchange,  we  have  the  general  promise  or  will- 
ingness of  all  the  people  to  accept  because  of  faith  in  the 
issuing  power,  we  have  the  thing  we  call  money  and  a  money 
system. 

With  this  brief  introduction  into  the  nature  and  uses  of 
money  we  are  prepared  to  see  how  it  is  used  in  banking; 
leaving  it  to  the  chapter  on  credit  to  treat  of  the  nature  and 
uses  of  credit  as  it  applies  to  banking  transactions. 


CHAPTER  II. 

THE  BANK  AS  A  CREDIT  MACHINE 

Metallic  money  proving  expensive  and  inconvenient,  the 
paper  substitute  was  devised,  and  credit  operations  evolved, 
so  that  money  in  the  metal  is  now  mainly  used  only  in  the 
final  settlements  and  as  the  basis  of  the  credit  system.  The 
inconvenience  of  making  payment  every  time  a  trade  was 
consummated  resulted  in  the  system  of  deferred  payments, 
the  seller  accepting  in  lieu  of  his  goods  a  promise  in  some 
form  which,  in  his  estimation,  is  equivalent  to  the  thing  it- 
self. The  farmer  who  takes  a  load  of  produce  to  market 
may  be  willing  to  let  his  account  with  the  buyer  run,  and 
settle  at  some  future  time  in  a  manner  satisfactory  to  himself ; 
and  there  arises  the  book  account  form  of  credit.  He  may 
take  the  buyer's  note,  and  there  arises  a  negotiable  instru- 
ment. He  may  accept  a  check  on  a  bank,  and  there  comes 
into  being  another  form  of  credit  instrument,  in  wide  use 
and  in  popular  favor.  He  may  take  the  promise  of  a  bank 
to  pay  money — coin  on  demand — and  there  is  issued  to  him 
another  form  of  credit  instrument,  the  bank  note;  or  he  may 
take  a  greenback,  which  is  a  Government  promise  to  pay 
money.  It  is  for  him  to  decide  who  his  creditor  will  be,  but 
most  likely  it  will  be  a  bank.  But  whatever  form  the  pay- 
ment takes,  it  will  be  some  variety  of  credit,  unless  the  mat- 
ter is  settled  in  gold  or  silver,  which  is  not  the  common 
practice. 

If  he  were  a  European  farmer  he  might  draw  a  draft  on 
the  merchant,  which  the  latter  would  "accept,"  and  the  farm- 
er could  either  keep  it  until  maturity,  or  sell  it  to  a  bank, 
and  in  this  we  would  have  acceptance  credit,  as  described 
hereafter  in  detail. 

If  the  farmer  becomes  suspicious  of  the  merchant,  he 
will  ask  that  the  book  account  be  settled;  if  he  questions  the 
ability  of  the  maker  of  the  negotiable  instrument  to  meet  it 
at  maturity  he  will  either  refuse  it  or  ask  a  surety;  if  he 
questions  the  solvency  of  the  maker  of  the  check,  or  the 
soundness  of  the  bank,  he  will  cash  it  or  have  it  certified  as 
soon  as  possible;  if  he  questions  the  bank's  ability  to  meet  the 


THE    BANK    AS    A    CREDIT    MACHINE  19 

notes  issued  by  it,  he  will  ask  for  gold;  if  he  distrusts  the 
greenback  (as  many  did  in  1893)  he  will  also  turn  it  into 
gold. 

Confidence  in  the  instrument  is  the  basic  point,  and  as 
long  as  this  confidence  exists  the  credit  instrument  will 
answer  all  the  purposes  of  money,  and  be  cheaper. 

And  so  these  periodic  panics,  particularly  banking  pan- 
ics, are  due  to  the  distrust  of  the  community  in  the  ability 
of  the  debtor  to  fulfill  engagements.  The  general  desire 
on  the  part  of  the  people  at  such  times  is  to  change  their 
debtors.  A  run  on  a  bank  is  simply  this  and  nothing  more. 
The  people  prefer  to  trust  the  bank  on  its  notes  rather  than 
on  deposit  account,  and  so  withdraw  their  deposits.  If  they 
distrust  the  bank  note,  they  will  ask  for  gold. 

A  general  liquidation  is  therefore  a  general  change  in 
the  relation  of  debtors  and  creditors. 

! 

TRUST  THE  BASIS  OF  THE  CREDIT  SYSTEM 

In  the  end  someone  must  be  trusted.  The  laborer  must 
trust  his  employer  from  week  to  week,  that  he  will  get  his 
wage  at  the  appointed  time ;  the  clerk  or  salaried  man  trusts 
the  firm  from  month  to  month.  The  physician  trusts  his 
patient,  the  minister  Ms  congregation.  The  farmer  trusts 
the  wholesaler,  arid  the  jobber  the  retailer.  The  retailer 
trusts  the  consumer  and  the  consumer  trusts  the  employer, 
so  that  it  completes  the  cycle  of  credit.  Trust  that  at  the 
appointed  time  payment  in  money  or  its  equivalent  will  be 
made,  is  the  very  bedrock  of  all  national  and  individual  well- 
being.  And  in  the  confidence  that  men  will  keep  their  en- 
gagements business  moves.  Moreover,  out  of  this  system  of 
trusting,  interest  as  a  compensation  for  the  use  of  money  or 
credit  arises. 

It  is  the  business  of  the  bank  to  deal  in  money,  credit 
and  credit  instruments;  to  safeguard  metallic  money  and 
create  "paper  money";  to  buy  credit  instruments  and  lend 
its  funds  on  the  strength  of  credit  instruments.  A  bank  is 
an  institution  where  deposits  of  money  are  received  and  paid, 
where  credit  is  manufactured  and  extended  to  borrowers, 
and  where  the  exchange  of  property  is  facilitated.  Having 
first  acquired  the  confidence  of  the  community,  the  bank 
extends  its  credit  by  purchasing  interest-bearing  securities, 


14        THE  PRACTICAL  WORK  OF  A  BANK 

mainly  business  men's  notes,  payable  at  a  fixed  time,  and 
giving  the  sellers  the  right  to  draw  checks  upon  itself  pay- 
able at  sight.  The  amounts  thus  authorized  to  be  drawn  are 
termed  deposits,  the  bank  being  liable  for  them  in  the  same 
way  as  for  actual  money  deposited.  It  is  found  in  practice 
that  a  bank  may  safely  extend  its  credit  to  an  amount  much 
larger  than  its  cash  on  hand,  the  excess  being  an  inexpen- 
sive but  useful  addition  to  the  world's  instruments  of  ex- 
change.1 

MANUFACTURING  CREDIT 

We  have  said  that  a  bank  is  a  credit  manufactory.  This 
is  its  chief  benefit  to  the  community  at  large.  It  has  the 
power  to  create  credit,  to  make  it  effective. 

The  ordinary  American  bank,  whether  a  national  bank, 
a  State  bank,  a  trust  company  or  a  private  bank,  is  an 
organization  designed  to  collect  the  unemployed  funds  of 
the  community  in  which  it  is  located  and  to  lend  these  funds 
to  the  borrowing  community,  which  in  a  general  way  may 
be  classified  as  the  trading  element  of  that  community.  In 
short,  the  business  of  banking  embraces  primarily  the  func- 
tion of  collecting  and  lending  capital.  Banking,  therefore, 
is  the  business  of  dealing  in  credits.2 

Let  us  follow  briefly  this  creation  of  credit.  Let  us  sup- 
pose that  an  individual  starts  a  bank — to  all  intents  and 
purposes  as  effective  a  credit  machine  as  a  corporation. 
He  has  $10,000  capital  of  his  own.  His  cash  deposits  reach 
the  sum  of  $50,000  and  he  has  thus  $60,000  in  cash,  con- 
sisting of  gold,  silver,  gold  and  silver  certificates  and  other 
forms  of  currency.  He  knows  that  as  a  general  rule  all  the 
$50,000  deposits  will  not  be  called  for  at  the  same  time. 
Ordinarily  this  is  true,  and  payment  of  only  a  small  part 
will  be  required  at  one  time;  but  when  a  larger  portion  than 
was  anticipated  is  called  for,  suspension  of  payment  results. 
Moreover,  there  will  be  deposited  daily,  as  a  rule,  about  as 
much  as  is  drawn  out,  so  that  the  amount  of  cash  is  at  the 
$60,000  point  most  of  the  time.  The  banker  argues  that  if 
with  $10,000  of  his  own  and  a  reputation  for  honesty  and 


iWhite,  "Money  nnd  Banking,"  p.  226. 

zj.  H.  Talhert,  Late  Vice-President  National  City  Bank,  New  York,  lecture 
before  New  York  Chapter,  American  Institute  of  Banking. 


THE    BANK    AS    A    CREDIT    MACHINE  15 

business  sagacity,  the  public  will  trust  him  with  $50,000  on 
the  strength  of  his  original  capital,  he  can  further  extend  his 
operations  by  using  the  whole  fund  as  a  basis  of  credit.  He 
can  begin  to  operate  a  credit  machine.  His  statement  would 
now  appear  as  follows: 

ASSETS  LIABILITIES 

Cash  on  hand $60,000  Capital    $10,000 

Due   depositors    50,000 

Total     $60,000  Total     $60,000 

OPERATING  A  CREDIT  MACHINE 

The  banker  now  begins  to  discount  promissory  notes 
and  to  make  loans.  He  has  found  by  experience  that 
$10,000  in  cash  meets  all  his  liabilities,  and  he  can  therefore 
safely  extend  credit  to  four  times  his  cash  holdings.  He  does 
not  pay  out  money  for  the  loans  he  makes,  nor  for  the  dis- 
counts, his  clients  being  satisfied,  and  preferring,  to  have 
credit  on  his  books  for  the  amount,  against  which  they  can 
draw  their  checks.  The  proceeds  of  the  loans  are  placed  on 
deposit  and  we  therefore  find  his  statement  to  be  as  follows : 

ASSETS.  LIABILITIES 

Cash  on  hand $60,000  Capital    $10,000 

Loans  and  discounts 200,000  Due   depositors    250.000 

Total    $260,000  Total    $260,000 

If  by  this  process  the  banker  with  but  $60,000  in  money 
has  created  something  that  will  take  the  place  of  money  in 
payment  of  obligations,  he  has  created  a  new  force  in  the 
world,  and  this  force  is  credit.  If  all  the  depositors  should 
draw  their  checks  for  the  full  amount  due  them  and  put 
them  in  circulation  and  they  came  home  for  payment  in  a 
short  time,  with  but  $60,000  to  meet  them,  the  banker  would 
soon  become  insolvent — unable  to  meet  his  obligations;  but 
against  the  debts  he  has  incurrea  he  has  obligations  due  to 
him;  and  he,  therefore,  has  taken  the  loans  and  discounted 
the  notes  with  a  view  to  their  maturity,  and  out  of  the  pro- 
ceeds of  the  maturing  loans  he  expects  to  pay  those  who  pre- 
sent checks.  There  is,  therefore,  a  constant  inflow  and  out- 
flow of  cash,  the  one  offsetting  the  other. 

Just  what  proportion  of  cash  he  must  keep  on  hand  to 
be  safe,  is  the  art  of  banking.  To  keep  his  assets  "liquid" — 


16  THE   PRACTICAL  WORK  OF   A   BANK 

that  is,  running  all  the  time,  so  that  as  funds  are  demanded 
funds  will  be  received — is  to  keep  his  bank  safe.  If  too 
large  a  portion  of  cash  is  on  hand,  evidently  the  profits  will 
be  less ;  if  too  little,  a  heavy  demand  cannot  be  met  without 
sacrifice  of  some  of  the  securities  or  calling  loans.  Some 
banks  in  the  war  period  of  1914  had  as  high  as  fifty-one  per 
cent,  of  their  liabilities  in  cash — a  very  large  and  unprofit- 
able amount.  They  were  fearful  that  heavy  demands  would 
be  made  on  them,  and,  therefore,  allowed  cash  to  accumulate 
until  satisfied  that  there  was  enough.  On  the  other  hand, 
however,  in  ordinary  times  as  low  as  fifteen  per  cent,  is  suf- 
ficient, and  in  savings  banks,  with  the  notice  of  withdrawal 
permissible  by  law  and  the  widely  scattered  depositors  and 
the  constant  inflow  of  cash,  a  reserve  of  less  than  ten  and  as 
low  as  five  per  cent,  is  sufficient. 

The  checks  which  are  drawn  against  the  deposit  liability 
of  the  banker  are  as  effective  as  the  cash  itself  to  settle  debts. 
They  do  not  circulate  with  the  same  freedom  as  money,  inas- 
much as  they  are  of  non-uniform  denominations,  are  not  so 
widely  known  as  bank  notes,  and  subject  to  fraud  and  for- 
gery; but  they  are  a  very  potent  force  in  the  business  world, 
it  being  estimated  that  fully  ninety-five  per  cent,  of  the 
transactions  are  carried  on  by  their  use,  and  in  the  wholesale 
trades  in  some  sections  ninety-eight  per  cent,  of  the  bank 
deposits  are  in  form  of  checks. 

FORMS  OF  BANK  CREDIT 

As  a  credit  machine  the  bank  creates  two  main  forms  of 
circulating  credits:  bank  notes  and  checks.  The  bank  notes 
are  merely  its  promises  to  pay  on  demand.  The  checks  are 
simply  the  representatives  of  the  book  accounts.  Thus,  I 
have  an  account  with  a  bank.  The  bank  owes  me  so  much 
money.  The  evidence  consists  of  my  account  on  its  books 
.  and  its  account  with  me  in  the  pass-book  furnished  for  that 
purpose.  I  draw  my  check  as  my  lawful  right  and  send  it 
to  my  creditor.  I  put  that  much  of  my  account  in  circu- 
lation. It  passes  from  hand  to  hand,  place  to  place,  until  it 
comes  back  to  the  bank  for  payment,  when  the  debt  to  me  is 
cancelled  and  the  instrument  no  longer  in  effect. 

It  is  the  same  with  the  bank  note.  I  borrow,  say,  $100 
from  the  bank.  I  receive  in  return  for  my  note  the  prom- 


THE    BANK    AS    A    CREDIT    MACHINE  17 

ises  of  the  bank  to  pay  to  bearer  the  amount,  which  is  repre- 
sented by  twenty  of  its  promises  to  pay  to  bearer  $5  each  on 
demand.  I  pay  one  debt  after  another,  and  place  these  in 
circulation.  They  remain  out  longer  than  my  check,  for 
anyone  will  accept  them  at  their  face  value,  and  consequent- 
ly they  circulate  more  widely  than  my  check,  which  has  no 
standing  where  it  is  not  known ;  for  while  checks  come  home 
quickly  for  payment,  bank  notes  remain  out  longer.  But 
both  are  obligations  of  the  bank  to  pay  money. 

BANK-NOTE  CREDIT 

The  banker,  therefore,  creates  a  very  powerful  form  of 
credit  in  the  bank  note,  which  is  nothing  but  his  promise  to 
pay  to  the  holder  of  the  note  the  amount  named.  It  is,  of 
course,  issued  in  more  elaborate  form  than  the  check,  and  is 
usually  finely  engraved  to  prevent  counterfeiting.  It  may 
be  secured  by  a  general  lien  upon  the  banker's  assets,  as  in 
Canada;  by  a  deposit  of  certain  United  States  bonds,  as  in 
the  case  of  the  national  bank  notes ;  or  by  a  combination  of 
bonds  and  commercial  paper,  as  in  the  case  of  the  emergency 
currency  issued  by  the  banks  in  the  summer  of  1914;  or  by 
part  gold  and  part  commercial  paper,  as  are  the  notes 
issued  under  the  Federal  Reserve  Bank  System,  and  as 
now  obtains  in  Germany ;  but  the  elementary  principle  is  the 
same  in  all  cases — -it  is  a  promise  of  the  bank  to  pay.  There 
may  be  a  fund  held  by  some  central  authority  out  of  which 
the  notes  will  be  paid  as  presented;  or  a  fund  lodged  to 
guaranty  the  payment  of  all  notes  issued  by  all  banks,  as 
obtains  in  Canada;  but  the  point  we  now  emphasize  is  the 
fact  that  by  issuing  notes  the  bank  incurs  the  same  obliga- 
tion that  it  does  in  certifying  a  check. 

The  obligations  of  the  bank  on  the  checks  of  its  depositors 
and  on  its  notes  are  identically  the  same — both  are  demand 
obligations.  The  customer  issues  his  checks  as  needed,  while 
the  bank  issues  its  notes  where  checks  are  not  acceptable,  and 
as  the  needs  of  the  business  world  require.  For  instance,  a 
customer  wishes  a  loan  of  $1,000  for  the  purpose  of  paying 
off  the  farm  hands.  Checks  will  not  do.  Wages,  as  a  rule, 
must  be  paid  in  money.  Therefore,  the  banker  issues  $1,000 
of  his  own  promises  to  pay — bank  notes  which  he  may  create 


18        THE  PRACTICAL  WORK  OF  A  BANK 

for  this  express  transaction.  He  turns  the  note  into  his  own 
promises — pays  for  an  obligation  running  to  himself  by  issu- 
ing obligations  against  himself. 

People  generally  have  come  to  prefer  paper  money  to 
metallic,  using  the  latter  chiefly  for  small  change  operations. 

The  farm  hands  pay  their  grocer  and  butcher,  who  may 
in  turn  pass  the  notes  on,  or  deposit  them  in  the  bank;  and 
thus  in  due  course  they  will  come  back  like  the  check,  and  if 
the  holder  so  demands,  will  be  paid  in  coin  as  the  promise 
contemplates. 

The  bank  notes  will  be  paid  out  of  the  same  fund  as  the 
checks,  it  being  the  privilege  of  the  borrower  to  name  which 
form  of  bank  credit  he  prefers.  The  banker  has  no  option 
in  the  matter,  but  inasmuch  as  he  deals  largely  with  his  own 
customers,  he  takes  it  for  granted  that  most  of  his  loans  and 
discounts  will  become  deposits.  It  matters  but  little  to  the 
banker  which  form  of  credit  instrument  is  issued,  but  the 
bank  check  is  less  expensive  than  the  notes,  there  being  no 
tax  on  the  former;  but  the  latter  stay  out  longer  and  are 
usually  considered  distinctly  profitable  in  their  issue. 

AN  EXCHANGE  OF  CREDITS 

When  the  banker  makes  a  loan  or  a  discount  he  merely 
exchanges  one  form  of  credit  instrument  for  another.  For 
instance,  he  takes  my  note  for  $1,000  and  hands  me  $1,000 
of  his  bank  notes.  The  obligation  I  have  assumed  to  him  is 
an  asset;  the  obligation  he  has  assumed  on  the  notes  is  a 
liability.  The  one  appears  on  the  left  of  the  statement;  the 
other  on  the  right.  And  in  the  discount  operation  for  cash 
(bank  notes)  the  bank  has  exchanged  its  notes  for  my  note. 

In  the  discount  of  commercial  paper,*  the  bank  has  ex- 
changed a  less-known  credit  for  a  well-known  credit.  The 
credit  of  the  maker  of  the  note  is  not  generally  known,  and, 
as  in  cases  where  commercial  paper  is  bought  in  the  open 
market  from  brokers,  the  credit  of  the  maker  is  more  or  less 
a  banking  secret.  The  banker  passes  upon  this  credit,  and 
becoming  satisfied  that  it  is  good,  issues  in  return  for  it  his 
own  credit  instruments,  and  he  has  thus  turned  an  unknown 
into  a  known  credit.  He  has  made  a  non-circulating  credit 

•Meaning  its  purchase  by  issuing  bank  notes  for  the  proceeds. 


THE    BANK    AS    A    CREDIT    MACHINE  19 

circulating.     He  has  made  the  credit  divisible,  usable  and 
good. 

Bank  notes,  like  checks,  stay  out  only  so  long  as  they  are 
needed.  The  individual  who  has  a  check,  as  a  rule,  deposits 
it  promptly  for  collection;  at  least  he  should.  He  does  not 
want  to  carry  it  around ;  it  is  idle  money  to  him ;  he  does  not 
want  to  take  the  risk  of  the  bank  failing  before  the  check  is 
paid,  and  so  sends  it  home  promptly  for  redemption.  The 
bank  note  follows  the  same  rule.  It  circulates  only  so  long 
as  it  is  needed.  If  there  is  an  active  demand  for  money,  as, 
for  instance,  in  moving  crops,  there  will  be  large  amounts  of 
bank  notes  issued.  As  soon  as  the  holder  has  no  further  use 
for  the  notes  he  deposits  them  in  his  bank,  which  in  turn 
forwards  them  for  redemption  to  the  issuing  bank  (through 
the  Treasury  Department  at  Washington),  and  so  bank 
notes  appear  and  disappear  as  business  demands,  and  checks 
likewise. 

CERTIFICATION  CREDIT 

The  bank  not  only  creates  credit  and  credit  instruments, 
but  certifies  to  credit.  In  the  certified  check  it  exchanges  its 
own  for  the  maker's  credit.  The  credit  of  the  merchant  or 
tradesman  may  be  more  limited  than  that  of  the  bank,  and 
by  certifying  to  the  maker's  credit,  it  makes  it  more  accept- 
able. It  supplants  his  credit  with  its  own. 

This  function  is  quite  largely  an  American  development. 
The  certifying  of  a  check  is  simply  adding  "accepted," 
"good,"  "good  when  properly  endorsed,"  "certified,"  etc., 
on  the  face,  after  which  when  properly  signed  it  becomes  the 
obligation  of  the  bank  and  not  of  the  depositor.  It  means  in 
banking  practice  that  the  bank  has  charged  the  amount  to 
the  drawer's  account  and  credited  the  same  to  "certified 
check  account,"  and  holds  the  fund  awaiting  the  return  of 
the  check  for  payment.  It  is  most  commonly  used  in  Stock 
Exchange  transactions,  such  operations  being  carried  on 
quite  largely  by  the  use  of  certified  checks.* 

In  the  certification  of  checks  the  banker  has,  therefore, 
simply  certified  to  credit.  He  has  created  no  new  credit, 
but  a  better  class.  The  credit  must  be  existent  when  the 

•Where  the  certification  is  made  at  the  request  of  the  holder,  the  maker  is 
absolutely  released.  If  roade  at  the  request  of  the  maker,  before  the  check  is 
negotiated,  the  maker  is  still  liable. 


20        THE  PRACTICAL  WORK  OF  A  BANK 

certification  is  made,  and  the  act  of  certification  in  effect 
says  to  the  world:  "The  depositor  whose  name  appears  as 
maker  of  this  check  has  the  amount  to  his  credit  in  this  bank. 
The  signature  is  genuine.  We  certify  to  the  same  and  agree 
to  pay  to  the  party  to  whose  order  this  check  is  regularly  in- 
dorsed the  amount  for  which  we  have  certified.  The  maker 
is  discharged  of  his  liability  and  we  assume  it." 

It  can  readily  be  seen  that  this  results  in  the  check  hav- 
ing a  wider  and  freer  circulation  than  would  the  maker's 
individual  order;  for  his  was  an  order,  while  the  bank's  cer- 
tification has  made  it  a  promise.  And  certified  checks  to  a 
very  large  extent  circulate  as  money,  being  freely  accepted, 
and  are  the  medium  of  the  large  payments,  as  bank  notes  are 
the  medium  of  the  small. 

Of  course,  there  is  such  a  thing  as  a  false  certification, 
made  in  fraud,  and  this  has  no  weight  to  bind  the  bank ;  but 
the  certification,  if  regular,  works  as  above  noted,  and  the 
bank  is  responsible  for  the  amount  of  its  certification  even 
though  it  has  certified  a  raised  check.  But  the  bank  could 
only  charge  the  maker  in  the  amount  originally  drawn. 

Having  established  his  own  credit,  the  banker  thus  trades 
upon  that  credit,  by  adding  to,  or  supplementing,  the  credit 
of  others,  and  he  thus  operates  a  credit  machine. 

ACCEPTANCE  CREDIT 

One  striking  difference  between  European  and  Amer- 
ican banking  lies  in  the  form  of  credit  extended.  In  the 
American  bank  a  loan  is  primarily  a  cash  advance.  The 
banker  may  not  actually  lend  the  cash,  but  he  must  stand 
ready  to  redeem  the  checks  drawn  against  the  credit  which 
he  passes  when  a  loan  is  made.  If  he  is  asked  for  a  loan,  he 
looks  in  his  till,  and  if  he  finds  a  dollar  he  may  lend  four; 
and  if  he  lends  four,  he  must  keep  one  in  his  till.  Our  sys- 
tem of  reserves  requires  it.  He  must  regulate  his  affairs 
according  to  his  cash;  while  the  European  banker  lends  his 
credit.  He  does  not  concern  himself  about  the  cash,  for  the 
contract  of  the  one  for  whom  he  makes  the  advance  is  that 
he  will  have  the  funds  in  the  banker's  hands  when  the  ac- 
ceptance is  due. 

The  acceptance  is  highly  developed  in  European  coun- 
tries, being  a  very  common  form  of  credit  instrument.  The 


THE    BANK    AS    A    CREDIT    MACHINE  21 

operation  of  a  bank  acceptance  will  be  seen  by  taking  a 
typical  English  case.  Let  us  assume  that  an  importer  of 
coffee  in  London  is  about  to  bring  in  a  shipment  from  Bra- 
zil. He  is  in  good  standing  at  his  bank  and  arranges  the 
transaction  through  its  office. 

The  bank  agrees  with  him  that  upon  the  presentation  of 
a  draft  with  documents  attached,  signed  by  the  seller  of  the 
coffee,  they  will  accept  it,  and  give  him  an  instrument  called 
a  "letter  of  credit"  to  this  effect.  He  sends  the  letter  of 
credit  to  the  coffee  merchant  in  Brazil,  who  draws  a  bill  of 
exchange  on  the  London  merchant,  ships  the  coffee,  attaches 
the  bill  of  lading  and  insurance  papers,  and  takes  them  to 
his  local  bank.  The  local  bank  being  assured  of  having  the 
bill  taken  care  of  in  London,  buys  it  of  the  coffee  merchant 
and  forwards  the  draft  to  the  London  bank  for  acceptance. 
Upon  reaching  the  latter,  it  will  be  ''accepted,"  after  which 
it  can  be  sold  in  the  open  market ;  for  having  the  acceptance 
of  a  well-known  London  bank  it  becomes  "prime"  paper — 
the  very  best. 

Let  us  see  what  this  means.  The  bank  has  parted  with 
no  money.  It  has  simply  agreed  that  at  the  end  of  three 
months  from  the  date  of  acceptance  there  will  be  paid  at  its 
banking  house,  to  the  holder  in  due  course,  the  amount  of 
the  bill.  The  merchant  for  whom  the  acceptance  was  made 
has  agreed  with  the  bank  that  he  will  have  the  funds  in  its 
hands  to  meet  the  acceptance.  By  arranging  the  acceptance 
the  merchant  may  obtain  the  goods  and  in  the  course  of  the 
term  of  credit  turn  them  into  funds,  and  with  the  proceeds 
of  the  sale  make  provision  for  the  debt  when  due;  and  he 
has,  without  involving  any  money  of  his  own,  except  his  busi- 
ness capital,  carried  through  a  business  transaction. 

The  bill  might  have  been  drawn  on  the  buyer  arid  ac- 
cepted for  his  account  by  the  bank,  or  upon  the  bank  direct ; 
but  by  writing  its  name  across  the  face  the  bank  has  given 
new  power  to  a  credit  instrument — put  it  in  position  to  cir- 
culate freely  in  the  money  market,  and  be  taken  without 
question  by  anyone  looking  for  an  investment. 

For  thus  lending  his  credit  the  banker  will  charge  usu- 
ally a  quarter  of  one  per  cent,  for  three  months ;  but  since  it 
involves  no  cash,  but  only  credit,  it  is  all  profit  to  the  bank. 
The  rate  at  which  paper  bearing  a  first-class  bank  accept- 
ance will  be  discounted  is  so  favorable  that  it  will  be  profit- 


22  THE  PRACTICAL  WORK  OF  A  BANK 

able  for  the  merchant  to  pay  the  bank's  commission  in  order 
to  obtain  the  lessened  discount  rate. 

The  acceptance  form  of  bank  credit  is  not  as  yet  a  factor 
in  American  banking  methods,  but  under  the  Federal  Re- 
serve Act  arid  the  New  York  Banking  Law  banks  may 
make  these  acceptances  and  are  already  doing  so  in  large 
amounts.  The  report  of  the  New  York  Federal  Reserve 
Bank  as  of  March  1,  1919,  showed  $43,000,000.00  of  accept- 
tances  held.3 

This  power  to  make  an  acceptance  is  the  highest  form  of 
bank  credit  and  enables  a  bank  to  capitalize  its  credit  and 
make  it  effective.  Imagine  with  what  readiness  a  draft  ac- 
cepted by  the  National  City  Bank  of  New  York  would  sell 
anywhere.  The  buyer  would  not  care  who  made  the  draft, 
or  on  whom  drawn,  as  long  as  the  name  of  the  National  City 
Bank  appeared  thereon  it  would  pass  in  any  market  where 
the  National  City  Bank  was  known.  And  all  this  without 
the  use  of  a  single  dollar  of  money.  The  great  London 
banks  have  out  in  acceptances  about  $100,000,000  all  the 
time,  and  by  so  doing  they  add  this  much  to  the  working 
capital  of  the  country. 

In  times  of  stress  these  acceptances  may  be  discounted 
freely  at  the  central  banks,  being  "two-name  paper"  as  re- 
quired by  their  rules;  and  by  the  rediscount  system  they  are 
turned  into  a  circulating  medium — bank  notes,  freely 
accepted  everywhere. 

In  the  acceptance  credit  we  have  a  form  of  pure  credit, 
although  it  may  have  security  ultimately  back  of  it;  but  as 
it  operates,  it  is  essentially  credit,  being  based  upon  the 
standing  of  the  acceptor,  as  a  promissory  note  is  based  upon 
the  credit  of  the  maker. 

THE  LIMITS  OF  BANK  CREDIT 

There  is  a  limit  to  bank  credit  in  this  country,  based 
upon  our  system  of  rigid  reserves,  which  until  the  enactment 
of  the  Federal  Reserve  Law  was  as  high  as  twenty-five  per 
cent.,  now  reduced  to  eighteen  per  cent.  Part  of  this  could 

"On  March  6,  1915,  the  acceptances  of  the  Federal  Reserve  Banks  constituted 

23  per  cent,  of  the  commercial  paper  held,  which  amounted  to  $25,731,000.     On 
Tune  10,  1916,  acceptances  formed  32.2  per  cent,  of  the  total  assets  of  the  Federal 
Reserve  Banks.    On  July  7,  1917,  acceptances  formed  49.7  per  cent,  of  the  total 
resources  of  the  Federal  Reserve  Banks.     On  July  25,  1919,  "Bills  purchased  in 
open  market"  were  $375,556,000  out  of  total  resources  of  $5366,371,000.    On  De- 
cember 4,  1920,  the  latter  item  was  $243,055,000  out  of  total  resources  of  $6,303,- 
879,000. 


THE    BANK    AS    A   CREDIT    MACHINE  28 

be  kept  in  other  banks,  and  part  in  cash  in  the  vaults ;  but  the 
reserve  must  be  maintained  as  a  matter  of  complying  with 
the  law.  But  whatever  the  amount  of  the  cash  in  reserve,  it 
is  obvious  that  the  bank  with  $60,000  in  cash  cannot  meet  a 
sudden  demand  on  the  part  of  its  depositors  for  four  times 
that  amount  unless  it  can  quickly  obtain  the  money  due  it 
on  loans.  These  may  not  mature  quickly  enough  to  satisfy 
the  demands  of  depositors,  and  nothing  but  bankruptcy  fol- 
lows. If  there  can  be  found  a  way  by  which  these  promis- 
sory notes  may  be  turned  into  money  before  they  are** due — 
their  payment  anticipated;  if  the  bank  which  holds  them  can 
sell  them  to  some  other  bank  that  may  have  money  to  spare, 
such  a  condition  can  be  avoided. 

There  has  probably  never  been  a  case  where  all  the 
bank's  deposits  were  called  for  at  one  time,  but  something 
approaching  it  was  experienced  in  1907  when  one  bank  paid 
out  as  high  as  seventy  per  cent,  of  its  deposits  in  a  few 
weeks.  This  is  said  to  have  been  the  most  memorable  run 
ever  experienced  by  a  bank  without  closing  its  doors. 

Up  to  the  present  time,  we  have  had  no  institution  or 
class  of  institutions  equipped  for  rediscounting,  and  banks 
facing  a  sudden  demand  for  liquidation  by  depositors  could 
only  gain  help  by  selling  (rediscounting)  their  note  holdings 
to  a  correspondent,  or  by  selling  securities.  The  former 
might  not  be  possible  and  the  latter  costly.  But  under  the 
Federal  Reserve  Act  a  bank  can  now  send  the  paper  it  holds 
to  its  Federal  Reserve  Bank  for  rediscount,  the  latter  mak- 
ing payment  for  the  same  by  issuing  its  notes  on  the  secu- 
rity of  the  commercial  paper  so  deposited.  In  other  words, 
on  the  strength  of  the  promises  of  a  number  of  approved 
merchants  and  others  to  pay  a  certain  amount  at  a  certain 
time,  the  Federal  Reserve  Bank  will  issue  its  notes  which 
promise  to  pay  on  demand  a  specified  sum.  This  is 
the  principle  of  the  clearing-house  loan  certificate  elsewhere 
described.  Thus  we  have  a  bank  and  a  central  bank  creat- 
ing credit  instruments,  making  circulating  credits  out  of 
fixed  credits,  backed  in  the  main  by  other  credit  instruments 
— promises  to  pay — and  ultimately  gold. 

There  is  thus  a  limit  to  a  bank's  discounting  powers — 
this  limit  being  the  probable  call  of  its  depositors.  The 
law  may  estimate  that  twenty-five  per  cent,  cash  on  hand  is 
sufficient;  but  the  banker  himself  must  be  the  best  judge. 


34        THE  PRACTICAL  WORK  OF  A  BANK 

The  penalty  for  over-discounting  is  the  probable  difficulty 
that  might  arise  if  more  than  the  usual  portion  of  deposits  is 
demanded  at  one  time.  The  advantage  of  large  discounts 
and  low  cash  is  the  profit  that  arises;  for  the  larger 
the  loans  and  the  less  the  idle  money,  the  more  the  resultant 
profit  to  the  bank.  In  England  there  is  no  law  as  to  re- 
serves, the  banks  being  free  agents,  regulating  their  reserves 
according  to  the  conditions,  expanding  and  contracting  as 
the  occasion  warrants;  and  English  banks  have  an  enviable 
reputation  for  the  quality  of  their  administration. 

But  the  great  central  bank  stands  as  the  backbone  of  the 
banking  system,  operated  not  for  profit  but  service,  and 
which  can  and  in  Europe  does  carry  large  cash  reserves  (in 
France  as  high  as  seventy-five  per  cent,  at  times),  so  that 
demands  can  be  met  and  rediscounts  made  under  all  condi- 
tions. The  strength  of  the  Bank  of  England  was  never 
better  shown  than  in  the  present  war,  during  which  it  has 
accumulated  the  largest  gold  fund  in  its  history,  discounting 
at  normal  rates,  and  throughout  the  crisis  proven  its  title 
as  "the  greatest  bank  in  the  world,"  because  greatness  in  in- 
stitutions as  well  as  men  is  measured  by  the  way  they  con- 
duct themselves  in  trying  times. 

THE  CIJEARING  OF  BANK  CREDITS 

The  bank,  in  its  broadest  sense,  acts  as  a  credit  clearing- 
house. The  scope  may  be  local,  national  or  international; 
but  its  function  as  a  credit  machine  is  to  offset  debits 
against  credits,  and  the  process  that  obtains  in  a  small  com- 
pass operates  in  a  wider  sphere.  Let  us  suppose  that  there 
are  ten  merchants  in  a  town  doing  business  with  each  other. 
They  all  have  accounts  in  the  local  bank.  They  buy  and 
sell  among  themselves,  and  in  payment  give  checks  on  the 
bank.  These  are  deposited,  and  all  the  bank  does  is  to 
charge  the  one  and  credit  the  other.  It  "clears"  the  credits. 
If  they  should  all  go  out  of  business,  the  bank  would  pay 
each,  in  cash,  the  net  balance  that  resulted  from  their  oper- 
ations. In  other  words,  it  would  "settle"  the  balances  in 
cash.  And  expanded  to  its  ultimate  horizon,  this  is  what 
the  bank  does  as  a  credit-clearing  machine. 

The  bank  receives  checks  from  all  sources,  particularly 
its  customers,  and  sends  them  for  collection  through  routes 


THE    BANK    AS    A    CREDIT    MACHINE  25 

and  machinery  described  in  the  chapter  on  checks;  hut  it 
does  not  ask  that  the  checks  be  paid  in  money;  all  it  wants 
is  a  draft  on  some  large  city  bank.  If  two  banks  are  in  the 
same  town,  each  morning  they  will  exchange  checks,  and 
the  balance  will  be  adjusted  by  the  debtor  bank  drawing  its 
check  on  its  reserve  correspondent  in  settlement.  In  some 
cities  operating  clearing-houses,  checks  will  be  exchanged 
through  the  clearing-house,  the  banks  which  owe  balances, 
sending  their  draft  to  the  clearing  agent,  and  the  clearing 
agent  settling  with  the  creditor  banks.  No  money  passes,  the 
drafts  on  New  York,  Chicago,  or  other  large  city,  being  the 
medium  of  payment.  In  large  cities  only  the  net  balances 
of  clearing  operations  are  paid  in  money.  Checks  deposited 
by  customers  are  credited  to  their  accounts;  notes  are  col- 
lected and  credited  as  a  deposit;  checks  drawn  by  depositors 
are  paid  by  clearing,  or  by  drafts,  as  above  noted ;  bank  notes 
are  issued  on  the  credit  of  the  bank,  arid  so  banking  from 
first  to  last  is  a  credit  operation. 

INTERNATIONAL  CLEARINGS 

While  the  clearing  process  may  seem  complex,  especially 
in  foreign  exchange  transactions,  it  is  based  upon  the  funda- 
mental proposition  of  two  men  meeting  and  adjusting  their 
debts.  In  the  place  of  men,  however,  we  have  banks,  com- 
munities and  nations.  If  merchants  in  the  United  States 
sell  to  merchants  in  England  a  million  dollars'  worth  of 
goods,  and  English  merchants  sell  our  merchants  five  hun- 
dred thousand,  obviously  England  as  a  mercantile  commu- 
nity owes  the  United  States  half  a  million  dollars.  Our 
bankers  might  be  and  generally  are  satisfied  to  have  credit 
with  English  bankers  for  the  amount,  against  which  they 
can  sell  exchange — that  is,  take  money  on  this  side  and  give 
orders  on  the  English  bankers  which  the  latter  will  honor. 
But  if  the  American  bankers  should  want  payment  in  cash, 
gold  would  be  sent  by  steamer  to  New  York,  and  we  would 
thus  have  a  "gold  movement." 

The  elementary  principle  throughout  all  these  transac- 
tions, from  the  settling  of  a  debt  between  two  merchants,  by 
one  giving  the  other  a  check  on  his  bank,  which  is  deposited 
in  the  same  bank ;  the  merchants  of  a  city  settling  their  debts 
the  one  against  the  other  through  the  medium  of  the  banks; 


26        THE  PRACTICAL  WORK  OF  A  BANK 

the  banks  settling  through  the  clearing-house;  the  settling  of 
balances  due  from  place  to  place,  country  to  country, 
through  the  selling  of  bankers'  orders,  involves  the  same 
idea — an  exchange  of  credits.  Banks  are  the  medium 
through  which  these  exchanges  are  made,  money  being  used, 
if  at  all,  only  to  adjust  the  net  balances. 

This  credit  machine  is  a  wonderfully  delicate  machine, 
and  of  great  usefulness.  It  moves  silently  and  effectively, 
and  works  perfectly  under  ordinary  conditions,  and  only 
under  such  unusual  conditions  as  are  brought  about  by  a 
great  war  is  the  equilibrium  disturbed.  J$y  gathering  the 
idle  capital  of  the  community  as  deposits,  and  thereby  sup- 
plementing its  own;  by  creating  credit  instruments;  by  ex- 
tending credit;  by  certifying  checks;  by  keeping  its  reserve 
as  a  safeguard  to  its  credit  operations  and  by  paying  its  de- 
positors' checks,  the  bank  acts  as  a  vast  credit  machine  in  the 
mercantile  world — a  public  benefactor  as  well  as  a  source 
of  private  gain. 


CHAPTER  III. 

BANKS,  BANKERS  AND  BANKING 

The  four  most  important  industries  are  agriculture 
transportation,  manufacturing  and  banking.  Agriculture 
produces  the  raw  material;  transportation  carries  it  to  the 
manufacturer  and  to  the  consumer;  the  manufacturer  turns 
the  raw  material  into  finished  and  usable  products,  and 
banking  provides  the  financial  and  credit  machinery  by 
which  these  processes  are  made  possible.  The  peculiar  func- 
tion of  the  bank  is  to  furnish  the  capital  and  the  credit 
The  other  industries  employ  it.  Without  the  bank,  trade 
and  industry  could  not  have  attained  the  present  high  state 
of  development,  for  banking  has  been  the  chief  motive  powei 
in  the  advance  of  material  civilization. 

The  marvellous  development  of  Germany  as  a  nation 
demonstrated  this  fact ;  and  that  development  was  largely  due 
to  the  interest  taken  by  the  banks  in  the  material  welfare  of 
the  country.  The  German  banks  are  closely  connected  with 
all  sorts  of  improvement  schemes.  They  are  represented  on 
the  boards  of  directors;  they  keep  in  close  touch  with  the 
businesses  which  they  have  financed.  For  instance:  a  steam- 
ship company  is  formed  to  operate  a  new  line  of  steamers 
The  bank  becomes,  in  a  sense,  a  partner.  It  provides  the 
capital  necessary  to  develop  the  company,  taking  back  bonds 
or  stock  in  payment.  When  the  project  is  finished,  the  se- 
curities are  sold  to  the  clients  of  the  bank,  with  the  latter's 
moral,  if  not  legal,  guarantee  that  the  proposition  is  sound 
and  worthy  of  investment,  and  a  new  fund  is  in  hand  for  an- 
other work.  By  thus  getting  close  to  the  actual  work  of  de- 
velopment, these  banks  have  played  a  most,  if  not  the  most, 
important  role  in  the  marvellous  growth  of  the  German 
Empire.* 

BANKING  MACHINERY  NECESSARY 

It  is   not  enough  to    produce — to   manufacture — there 
must  be  the  financial  machinery  to  carry  the  burden  of 

*This  was  no  doubt  part  of  her  comprehensive  scheme  of  world-wide  dominion, 
now  happily  prevented  by  her  collapse  as  a  military  power.     (March,  1919.) 

27 


28        THE  PRACTICAL  WORK  OF  A  BANK 

growing  the  crops,  of  taking  to  market,  of  turning  raw  ma- 
terial into  usable  form,  all  of  which  calls  for  credit,  which 
credit  can  best  be  furnished  by  banking;  for  by  the  opera- 
tion of  banking  credit,  one  dollar  of  money  does  the  work 
of  four,  and  by  using  money  as  the  basis  of  credit,  credit 
may,  in  ordinary  times,  be  extended  on  the  ratio  of  four  to 
one,  thus  multiplying  the  usefulness  and  effectiveness  of 
metallic  money  fourfold.  Banking  makes  money  a  potent 
force.  It  makes  credit  elastic  and  safe. 

THE  PRIVATE  BANKER 

The  first  bank  was  a  banker.  The  individual  who  con- 
ducted a  banking  business  as  part  of  his  mercantile  opera- 
tions soon  found  that  he  could  employ  more  capital  than  he 
had,  and  so  he  associated  others  with  him.  It  thus  became  a 
partnership.  In  the  course  of  time  it  was  found  advisable 
to  incorporate  under  the  banking  laws,  or  to  apply  for  spe- 
cial charter  (in  early  days  most  banks  were  created  by  spe- 
cial act),  in  order  that  the  business  might  be  perpetuated 
and  that  it  might  expand  with  the  changing  needs  of  the 
community. 

Banking  was  originally  a  common  law  right.  Any  citi- 
zen could  be  a  banker — if  his  neighbors  would  trust  him ;  but 
the  business  being  more  or  less  of  a  public  character,  inas- 
much as  it  deals  with  money,  credit  and  credit  instruments, 
and  by  the  functions  it  enjoys  touches  the  public  intimately, 
soon  became  a  special  privilege,  granted  by  law  or  the  leg- 
islature. While  some  men  could  be  trusted  to  use  these 
privileges  wisely,  it  would  not  do  to  permit  anyone  to  re- 
ceive deposits,  issue  notes  and  loan  money,  for  the  power 
would  be  abused.  Therefore,  public  control,  both  in  the 
granting  of  the  privilege  and  inspection  thereafter,  became 
necessary  for  the  common  good.  Even  as  late  as  1913,  the 
right  to  do  business  as  a  private  banker  was  not  restricted 
or  supervised  in  the  great  State  of  New  York,  and  only 
grave  abuses  at  an  opportune  time  led  the  revision  commit- 
tee of  1914  to  make  adequate  provision  for  the  regulation  of 
private  bankers. 

There  are  many  cases,  however,  where  the  community 
would  not  have  banking  facilities  at  all,  were  it  not  for  the 
private  banker,  who  combines  banking  with  other  business, 


BANKS,   BANKERS    AND    BANKING  29 

and  fulfills  a  very  necessary  place  in  the  community's  life; 
but  with  the  capitalization  requirements  only  $25,000  for 
country  banks  in  the  National  Banking  Act,  and  in  some 
places  but  $10,000  under  State  laws,  the  organization  of  a 
bank  is  not  a  difficult  matter;  and  in  many,  if  not  most, 
small  towns  and  villages  the  incorporated  bank  will  now  be 
found.  But  the  day  of  the  private  banker  is  over,  for  in 
the  course  of  events  the  corporation  has  become  the  recog- 
nized form,  and  only  those  who  are  already  in  the  business 
are  likely  to  operate  as  such.  And  even  these  are  taking  on 
the  corporate  form  as  time  goes  on. 

Not  only  was  banking  once  incidental  to  other  business. 
but  the  legislatures  were  often  hostile  to  granting  bank 
charters,  and  only  by  subterfuge  could  a  bill  be  gotten 
through.  Thus  the  famous  Chemical  National  Bank  was 
originally  the  banking  department  of  the  New  York  Chem- 
ical Manufacturing  Company.  The  Farmers  Loan  and 
Trust  Company  was  the  banking  end  of  the  Farmers  Fire 
Insurance  Company.  The  most  notable  case  is  that  of  the 
Bank  of  the  Manhattan  Company,  which  was  chartered  pri- 
marily as  a  water  company  with  banking  privileges,  but  de- 
veloped its  banking  function  much  more  rapidly  than  its 
water  works,  whether  by  design  or  not  is  not  the  question; 
the  fact  remains  that  it  is  a  large  and  influential  bank  at  pres- 
ent, but  the  original  well  and  the  tank  on  the  roof  still  re- 
main as  evidence  that  it  is  a  water  company  primarily  and 
a  bank  secondarily,  by  charter  if  not  by  practice.  The  char- 
ter after  granting  it  powers  incidental  to  a  water  company 
empowered  it  "to  utilize  its  surplus  funds  in  the  purchase  of 
public  or  other  stocks,  or  in  any  other  moneyed  transactions 
or  operations,  etc."  And  thus  an  innocent  appendage  to  a 
charter  to  operate  a  water  company  opened  the  door  to 
banking  functions.  For  thirty  years  it  was  a  water  com- 
pany, but  for  a  century  it  has  been  a  bank. 

BANKS  DISTINGUISHED 

We  must  distinguish  between  those  institutions  which  in 
a  sense  create  capital,  from  those  which  work  on  capital  al- 
ready accumulated.  Of  the  former  class  are  to  be  men- 
tioned particularly  the  mutual  savings  banks,  which  have  no 
capital,  and  whose  funds  are  obtained  by  receiving  the  sav- 


80        THE  PRACTICAL  WORK  OF  A  BANK 

ings  of  the  small  depositor  and  combining  them  into  a  com- 
mon fund  large  enough  to  make  profitable  and  effective  in- 
vestment in  mortgage  loans  and  other  securities. 

The  banks  of  discount  and  other  capitalized  banking  in- 
stitutions have  as  the  foundation  for  their  operations  the 
funds  which  have  been  in  a  sense  made  capital  prior  to  in- 
vestment in  the  enterprise.  The  stockholder  in  a  bank  of 
discount  has  saved  his  money  until  he  has  accumulated  a 
fund  sufficiently  large  to  make  investment  in  a  bank  possi- 
ble. He  must  have  at  least  $100  in  order  to  become  a  mem- 
ber of  the  corporation,  while  the  savings  bank  opens  its 
doors  to  the  man  with  one  dollar  and  often  to  the  child  with 
ten  cents.  In  the  one  you  must  be  a  small  capitalist  before 
"joining  the  bank,"  while  in  the  other  you  become  a  small 
capitalist  through  the  bank.  The  savings  bank  is  the  receiv- 
ing reservoir  for  the  little  streams,  out  of  which  pours  the 
larger  stream,  while  the  bank  of  discount  utilizes  power  al- 
ready assembled.  In  the  savings  bank  every  depositor  is  in 
a  sense  a  stockholder  and  stands  on  the  same  footing;  while 
in  a  bank  of  discount  the  depositors  are  creditors  and  the 
stockholders  are  owners.  The  savings  bank  depositor  is  a 
partner;  the  bank  of  discount  depositor  is  a  creditor.  The 
savings  bank  agrees  to  pay  back  the  money  on  due  notice; 
the  bank  of  discount  on  demand.  The  savings  bank  is  a 
mutual  investment  concern  more  than  it  is  a  bank;  while  the 
bank  of  discount  and  the  trust  company  as  generally  oper- 
ated, are  essentially  banks.  The  savings  bank  never  discounts 
notes,  nor  issues  money,  nor,  as  a  rule,  does  it  allow  check- 
ing privileges,  although  in  some  States  it  does  make  collat- 
eral loans  to  a  considerable  degree.  In  New  York  this  is 
permissible,  but  not  indulged  in  to  any  great  extent. 

We  do  well  to  get  the  distinction  between  the  two  clearly 
in  mind,  for  much  confusion  and  misunderstanding  of  the 
nature  and  functions  of  a  savings  bank  have  existed,  and  the 
line  of  demarcation  is  sharp  and  well  drawn.  Having  the 
differences  between  the  two  classes  of  institutions  clearly  un- 
derstood we  are  the  better  able  to  take  up  the  functions  of  a 
bank  of  discount. 

BANKS  DEFINED  AND  CLASSIFIED 

Banks  may  be  divided  into  seven  classes:  (a)  Banks  of 
discount,  comprising  national  banks,  State  banks,  private 


SI 

and  individual  bankers,  (b)  Trust  companies.  These  in 
most,  if  not  all,  instances  do  a  banking  business,  and  in  con- 
nection, a  trust,  and  in  some  cases,  a  savings  bank  business, 
(c)  Savings  banks,  which  are  essentially  investment  insti- 
tutions, receiving  small  deposits  for  cooperative  investment. 
These  are  further  divided  into  mutual  and  stock  savings 
banks,  the  latter  predominating  in  the  West  and  South,  and 
the  former  almost  exclusively  in  the  Eastern  and  New  Eng- 
land States,  (d)  Building  and  loan  associations,  (e)  Mort- 
gage companies,  (f)  Safe  deposit  companies,  (g)  Loan 
companies,  personal  and  chattel. 

A  bank  of  discount  may  be  defined  as  a  moneyed  corpo- 
ration, authorized  by  law  to  receive  deposits  and  pay  checks ; 
discount  and  negotiate  promissory  notes,  drafts,  bills  of  ex- 
change, and  other  evidences  of  debt;  to  lend  money  on  real 
or  personal  security;  to  buy  and  sell  gold  and  silver  bullion, 
foreign  coins  and  bills  of  exchange;  to  issue  its  circulating 
notes;  to  make  collections;  and  such  other  moneyed  trans- 
actions as  are  not  inconsistent  with  its  charter  or  the  laws 
under  which  it  operates. 

Horace  White,  in  "Money  and  Banking,"  defines  a  bank 
as  "An  institution  where  deposits  of  money  are  received  and 
paid,  where  credit  is  manufactured  and  extended  to  borrow- 
ers, and  where  exchange  of  property  is  facilitated.  Having 
first  acquired  the  confidence  of  the  community,  the  bank  ex- 
tends its  credit  by  purchasing  interest-bearing  securities, 
mainly  business  men's  notes,  payable  at  a  fixed  time  and  giv- 
ing the  sellers  the  right  to  draw  checks  upon  itself  payable 
at  sight.  The  amounts  thus  authorized  to  be  drawn  are 
termed  deposits,  the  bank  being  liable  for  them  in  the  same 
way  as  for  actual  money  deposited.1  * 

In  "The  Savings  Bank  and  Its  Practical  Work"  the 
author  of  the  present  work  defines  a  savings  bank  as  "A 
mutual  cooperative  institution  conducted  without  profit  to 
the  managers,  for  the  purpose  of  receiving  on  deposit  and 
for  safekeeping  such  sums  as  may  be  offered,  limited  by  the 
law  of  the  State,  and  investing  the  same  for  account  of  the 
depositors  jointly  and  severally  in  such  manner  as  shall  be 

i  White,  p.  227. 

*Under  powers  recently  conferred,  national  banks  and  state  banks  in  some 
jurisdictions  may  exercise  trust  functions,  so  that  they  enjoy  all  the  privileges 
heretofore  reserved  to  trust  companies. 


82        THE  PRACTICAL  WORK  OF  A  BANK 

prescribed  by  law,  and  paying  to  the  depositors  as  interest 
all  the  earnings  of  the  institution  except  the  amount  paid 
for  expenses  and  such  part  as  may  be  set  aside  and  held  in 
reserve  as  a  guaranty  fund  for  the  benefit  and  protection 
of  all." 

Technically  speaking,  a  trust  company  is  a  corporation 
organized  for  the  purpose  of  accepting  and  executing  trusts, 
acting  as  trustee  under  wills,  bond  issues,  registrar  of  bonds 
and  stocks,  executor  or  administrator  of  estates,  etc.,  al- 
though by  law  and  practice  trust  companies  may  do  a  gen- 
eral banking  business,  but  do  not  issue  currency. 

Building  and  loan  associations  are  mutual  organizations 
formed  for  the  purpose  of  assisting  men  to  own  their  own 
homes.  They  accumulate  savings  and  in  many  cases  do  a 
savings  bank  business,  but  they  are  essentially  for  the  pur- 
pose of  helping  people  save  by  regular  monthly  installments 
for  the  purpose  of  home  ownership,  lending  only  to  members 
on  real  estate  security. 

Mortgage,  or  mortgage  investment  companies,  are  de- 
fined in  the  New  York  law  as  "corporations  other  than  an 
insurance  company  formed  under  the  laws  of  this  or  any 
other  State  for  the  purpose  of  selling,  offering  for  sale,  or 
negotiating  to  individuals  other  than  bankers,  bonds  or  notes 
secured  by  deeds  of  trust  or  mortgages  on  real  property  or 
choses  in  action,  owned,  issued,  negotiated  or  guaranteed  by 
it,  or  for  the  purpose  of  receiving  any  money  or  property, 
either  from  its  own  members  or  from  other  persons,  and  en- 
tering into  any  contract,  engagement  or  undertaking  with 
them  for  the  withdrawal  of  such  money  or  property  at  any 
time  with  the  increase  thereof,  or  for  the  payment  to  them 
or  to  any  person  of  any  sum  of  money  at  any  time,  either 
fixed  or  uncertain." 

Safe  deposit  companies  are  those  renting  out  safes  in 
vaults  for  the  protection  of  valuables  in  any  form. 

Personal  loan  companies  are  those  which  make  a  busi- 
ness of  loaning  on  personal  security  to  needy  borrowers, 
generally  in  small  sums.  Of  this  class  are  pawnbrokers  and 
other  lending  concerns  which  loan  on  pledge  of  jewelry,  etc., 
or  personal  indorsement  of  a  third  party.  This  work  has 
particular  reference  to  banks  of  discount,  but  aside  from  the 
trust  functions,  applies  equally  to  trust  company  operations. 


BANKS,   BANKERS    AND    BANKING  88 

THE  FUNCTIONS  OF  A  BANK 

The  functions  of  the  bank  are  fivefold:  (1)  To  assemble 
capital  and  make  it  effective.  This  it  does  by  assembling 
capital  of  its  own,  and  by  attracting  private  capital.  In 
the  organization  of  a  bank  the  stockholders  "subscribe"  to 
the  stock,  which  simply  means  that  they  unite  their  private 
capital  with  that  of  the  other  stockholders,  so  that  the  ag- 
gregated fund  becomes  the  "capital  stock"  or  "capital"  of 
the  bank.  The  stockholders  are  the  partners  in  the  enter- 
prise. The  profits,  if  any,  belong  to  them;  the  losses,  if  any, 
must  be  shared  by  them.  In  proportion  to  their  holdings 
they  are  entitled  to  the  profits  and  likewise  must  be  account- 
able for  the  losses.  As  a  general  rule  the  liability  is  twice 
the  amount  of  stock  held ;  that  is,  if  a  stockholder  owns  $500 
worth  of  stock,  he  is  liable  to  have  his  stock  cancelled  and  be 
subject  to  an  assessment  of  $500  in  addition,  in  case  the 
bank  fails.  This  is  generally  spoken  of  as  the  "stockholder's 
double  liability."  With  this  fund  as  a  starting  point,  the 
bank  is  ready  to  do  business.  It  loans  this  fund  to  borrow- 
ers and  thus  makes  its  profits.  But  if  the  capital  fund  were 
all  the  bank  had  with  which  to  work,  it  would  not  prove  a 
profitable  undertaking,  for  after  deducting  expenses  and 
losses,  the  profits,  if  any,  would  be  small.  It,  therefore,  in- 
vites the  public  to  open  accounts  with  it,  and  it  thus  assem- 
bles another  fund,  the  deposits,  which  it  employs  in  making 
loans,  buying  securities,  etc.,  so  that  we  have  not  only  an 
additional  fund,  but  another  function  of  the  bank,  i.  e.  (2) 
To  receive  deposits.  Contrary  to  the  prevailing  idea,  the 
bank  does  not  receive  the  money  offered  it  for  safekeeping. 
Neither  does  it  receive  the  fund  for  mutual  investment  as  is 
the  case  in  mutual  corporations  such  as  savings  banks;  but 
the  bank  of  discount  in  receiving  the  deposit  becomes  the 
absolute  owner  of  the  fund,  and  the  relation  of  debtor  and 
creditor  is  established  between  the  bank  and  the  depositor. 
The  bank  thereafter  owes  the  depositor  the  amount,  and 
agrees  to  pay  the  same  upon  demand. 

It  is  interesting  to  note  in  passing,  that  while  fully 
ninety-five  per  cent,  of  the  force  of  the  bank  is  engaged  in 
the  work  arising  from  the  ramifications  of  the  deposit  func- 
tion in  banking,  their  efforts  produce  no  income  except  the 
incidental  item  of  "Exchange."  It  is  the  service  rendered  by 


84  THE   PRACTICAL  WORK  OF   A  BANK 

them,  however,  which  in  a  large  measure  attracts  and  retains 
the  balances  which  make  possible  the  exercise  of  the  discount 
and  lending  functions. 

BANK  DEPOSITS 

The  deposits  of  the  bank  are  divided  into  three  main 
classes,  namely,  general,  specific  and  special.  The  general 
deposit  is  the  most  common.  The  bank  receives  the  fund  de- 
posited as  its  debt  to  the  depositor,  mingles  the  money  with 
other  funds  of  like  nature  and  pays  the  depositor  as  he  or- 
ders, usually  upon  his  check,  which  will  be  treated  subse- 
quently. 

The  contract  with  the  bank  in  general  deposits  is  never 
that  of  a  bailment,  where  the  bailee  receives  property  with 
the  agreement  to  return  the  same  identical  thing.  In  the 
case  of  a  bank  deposit  the  agreement  is  simply  to  return 
money  of  equal  amount. 

In  case  of  insolvency  of  the  bank  every  general  depositor 
is  a  creditor  of  the  bank.  Technically  every  creditor  is  a 
general  creditor.  If  one  is  entitled  to  payment  in  full,  it  is 
either  because  the  bank  holds  a  special  deposit  or  security, 
which  has  always  remained  the  depositor's  property,  the 
bank  being  bailee  under  agreement,  or  because  the  bank 
violated  a  trust  arid  by  reason  of  the  wrong  holds  a  special 
fund  which  belongs  to  the  depositor.  In  a  national  bank  all 
general  depositors  and  other  creditors  share  alike.  In  some 
States  the  depositors  in  State  banks  are  by  statute  preferred 
over  other  creditors  and  are  paid  in  full  before  other 
claimants. 

Frequently  when  a  bank  fails  attempts  are  made  to  es- 
tablish rights  to  preferences  by  showing  that  certain  deposits 
were  special  deposits.  But  the  ordinary  manner  in  which 
banks  do  and  in  these  days  must  do  their  business,  to  satis- 
fy the  demands  of  commerce,  facilitate  negotiations  and 
meet  the  customs  which  present-day  business  methods  re- 
quire, and  the  general  intentions  of  those  who  do  business 
wjth  banks,  when  sifted  out,  will  show  the  fallacy  of  this 
claim  for  preferences,  as  well  as  the  obvious  injustice  of  the 
claims. 

Even  though  the  money  is  deposited  for  a  specified  time, 
or  upon  unusual  conditions,  if  there  is  no  understanding  that 


BANKS,   BANKERS    AND    BANKING  85 

the  money  is  not  to  be  mingled,  the  bank  will  mingle  the 
amount  received  with  the  general  mass  of  its  property,  and 
in  most  States  the  deposit  is  a  general  one,  to  be  repaid  out 
of  the  general  mass  of  the  bank's  assets.2 

The  fact  that  a  general  deposit  is  a  debt  has  been  held 
by  the  courts  the  country  over,  and  as  in  the  case  of  all  debts, 
it  can  be  extinguished  only  by  payment. 

A  specific  deposit  is  a  deposit  made  for  a  specific  pur- 
pose, and  the  bank  has  instructions  to  apply  the  fund  for 
that  particular  purpose  and  no  other;  as,  for  instance,  to 
pay  off  a  mortgage,  or  to  pay  a  note  of  the  depositor.  The 
money  cannot  lawfully  be  mingled  with  the  funds  of  the 
bank,  it  being  a  separate  fund  for  the  particular  purpose. 

Special  deposits  are  those  where  the  identical  thing  is  to 
be  returned.  It  is  in  a  sense  a  bailment.  Thus,  if  money 
were  left  in  a  package;  bonds  or  stocks,  etc.,  left  with  the 
bank  (not  in  its  safe  deposit  vault  but  with  the  bank  as  a 
bank)  it  would  constitute  a  special  deposit  with  it,  if  the 
articles  or  money  were  left  on  such  conditions. 

Having  distinguished  between  the  various  classes  of  de- 
posits, we  are  concerned  mainly  with  the  first  class,  namely, 
the  general  deposits,  for  these  carry  another  important  func- 
tion as  well  as  duty  of  the  bank,  i.  e.,  to  make  payment 
when,  to  whom  and  in  the  amounts  designated  by  the  depos- 
itor, commonly  called  the  (8)  Checking  function,  which  has 
grown  to  such  proportions,  and  is  such  an  economic  neces- 
sity, that  it  may  be  considered  one  of  the  elemental  and  most 
important  functions  of  banking,  although  it  necessarily 
follows  the  deposit  function. 

Briefly  stated,  the  checking  function  gives  the  depositor 
the  right  to  draw  checks  on  the  bank  in  such  sums  as  he  may 
choose,  payable  on  demand,  to  the  party  designated  or  to 
bearer,  together  with  the  right  to  rescind  the  order  before 
payment,  and  the  bank  is  bound  to  pay  on  regularly  issued 
orders  as  long  as  the  maker  has  credit  for  the  amount  named 
with  it. 

(4)  The  function  of  discount,  which  includes  the  loan, 
the  distinction  being  trifling  between  the  two.  In  a  dis- 
count the  process  is  usually  as  follows:  A  presents  a  note 
payable  to  his  order  to  the  bank  and  asks,  not  that  the  bank 

2"The  Law  of  Bank  Deposits,"  Weitzel,  p.  8, 


86        THE  PRACTICAL  WORK  OF  A  BANK 

make  a  loan  on  it,  but  that  the  bank  discount  (buy)  it.  This 
it  does  by  deducting  the  interest  from  the  amount  and  turn- 
ing the  proceeds  over  to  him.  If  he  had  presented  his  own 
note  to  its  order  and  asked  for  the  money,  the  bank  would 
not  make  a  discount  in  the  technical  sense3,  but  loan  him  the 
amount,  taldng  his  note  in  evidence  thereof;  and  whether  the 
interest  was  deducted  when  the  discount  was  made  or  col- 
lected at  maturity,  it  would  be  a  loan  and  not  a  discount. 
These  advances  are  usually  reported  under  the  head,  "Loans 
and  Discounts,"  the  former  including  demand  and  collateral 
loans  as  well  as  the  time  loans. 

In  the  matter  of  commercial  paper,  the  bank  is  frequent- 
ly spoken  of  as  "buying"  the  paper;  while  in  the  strict  sense 
it  has  made  a  loan  through  the  agency  of  the  commercial 
paper  broker. 

The  last  and  a  very  important  function  is  the  issue  of 
money,  or,  to  be  correct,  currency,  commonly  referred  to  as 
(5)  the  note  issue  power.  Bank  notes  are  known  to  have 
been  issued  as  far  back  as  1670,  when  instruments  of  writing 
were  issued  by  the  goldsmiths  to  people  who  had  left  money 
in  their  care.  These  were  in  substantially  the  same  form  as 
bank  notes  of  to-day,  promising  to  pay  on  demand  a  speci- 
fied sum.  The  right  to  issue  such  notes  was  never  ques- 
tioned. They  were  simply  evidences  of  claims  against  the 
goldsmiths  for  money  left  in  their  care.  As  the  business 
grew  and  the  quantities  of  notes  called  for  increased,  it  be- 
came more  convenient  to  print  blank  forms,  to  be  filled  out 
with  the  names  of  the  depositors  and  the  amounts  due  them. 
Still  later  notes  were  printed  for  round  sums — five  pounds, 
etc. — which  could  be  handled  in  quantities,  and  these  were 
made  payable  to  order  or  bearer,  according  to  the  wish  of 
the  depositor.  The  business  of  discounting  commercial 
paper  was  added  to  the  goldsmith's  vocation  very  soon  after 
the  practice  of  depositing  money  with  him  became  common, 
and  then  the  notes  were  issued  if  desired  to  the  persons  get- 
ting the  discounts.4 

The  principle  of  issuing  such  notes  was  recognized  as  a 
right,  so  long  as  anybody  would  take  them.    But  experience 


«lt  is  the  common  practice,  however,  to  consider  all  loans  where  the  interest 
is  collected  in  advance  as  "discounts"  and  where  the  interest  is  collected  at 
maturity  or  periodically  as  "loans." 

4  White,  p.  225. 


BANKS,   BANKERS    AND    BANKING  87 

soon  taught  that  such  a  right  was  subject  to  abuse,  as  was 
evidenced  by  the  early  days  of  banking  in  this  country, 
when  thousands  of  merchants  and  dealers  the  country  over 
put  out  their  promises  to  pay,  until  the  condition  became 
chaotic,  and  it  was  recognized  here  as  well  as  in  the  early 
days  of  banking  in  other  lands,  that  this  right  to  issue  cir- 
culating notes  was  a  function  that  for  the  good  of  all  had 
to  be  regulated  by  the  State.  Banks  were,  therefore,  char- 
tered with  implied  or  express  power  to  issue  notes.  Other 
groups  of  individuals  had  this  right  without  incorporation 
as  a  bank,  it  being  the  first  function  of  some  corporations  to 
issue  notes  before  being  chartered  as  a  bank.  Thus,  the 
Bank  of  New  York  issued  circulating  notes  seven  years 
before  it  was  chartered  as  a  bank.5 

In  the  early  days  of  American  banking  the  bank  was  an 
association  of  individuals  whose  main  business  was  to  issue 
currency.  By  the  grant  of  "banking  powers"  was  meant  the 
power  to  issue  its  notes,  and  the  profit  came  from  the  power 
to  thus  issue  notes,  charging  interest  to  borrowers,  and  in 
many  cases  without  capital  of  its  own  to  safeguard  the 
issues.  Without  adequate  redemption  features,  and  by 
fraudulent  practices  these  privileges  were  abused  so  that 
banking  was  looked  upon  with  disfavor  by  legislators,  and 
charters  at  times  difficult  to  obtain.  Daniel  Webster  is  said 
to  have  observed  that  the  power  to  issue  notes  to  circulate 
as  money  was  the  feature  which  distinguished  a  bank  from 
every  other  institution.6  The  issue  of  notes  is  not  now  the 
function  of  State  banks,  the  National  Banking  Act  placing 
a  tax  of  ten  per  cent,  on  all  issues  of  State  bank  notes,  so 
that  it  becomes  unprofitable,  and  no  State  notes  have  been 
issued  in  many  years.  In  the  revision  of  the  New  York 
Banking  Law  in  1913  the  sections  relating  to  note  issues  in 
the  old  law  were  entirely  eliminated,  it  being  considered 
that  the  issue  of  notes  by  State  banks  in  New  York  was  no 
longer  a  probability  and  the  law  therefore  makes  no  pro- 
vision for  such  operations. 

5  White,  p.  225. 

6  White,  p.  217. 


CHAPTER  IV. 

THE  ORGANIZATION  AND  ADMINISTRATION 

OF  A  BANK 

The  organization  of  a  bank  may  be  due  to  any  one  of 
several  reasons,  such  as  a  desire  on  the  part  of  a  bank  man 
for  an  official  position;  an  attorney  desirous  of  bank  patron- 
age; dissension  among  the  directors  or  stockholders  of  one 
bank,  which  results  in  a  rival  institution :  public  spirit,  which 
appreciates  the  need  of  and  benefits  of  a  banking  institution; 
the  work  of  a  professional  promoter,  etc.;  but  in  the  last 
analysis,  the  bank  results  from  the  desire  on  the  part  of 
those  who  have  capital  to  employ  it  effectively  through  such 
an  institution.  Otherwise  the  capital  stock  could  not  be 
assembled. 

There  may,  of  course,  be  ulterior  motives  back  of  it  all, 
such  as  a  desire  to  secure  large  accommodations  as  borrow- 
ing directors,  but  the  reason  last  noted  must  be  controlling 
if  the  bank  is  to  secure  support  from  moneyed  interests. 

Through  the  agency  of  the  bank  funds  which  are  idle 
are  brought  into  use  and  employed  profitably.  Through 
the  medium  of  the  bank  the  man  who  needs  and  can  use 
funds  meets  the  man  who  has  funds  to  loan.  Thus  produc- 
tion is  greatly  stimulated  and  capital  increased.  And  for 
the  bringing  together  the  banker  is  entitled  to  his  profit,  as 
well  as  is  the  capitalist,  large  or  small,  who  furnishes  the 
means  that  make  the  banking  operations  possible. 

It  is  possible  to  conceive  a  bank  starting  with  no  funds 
of  its  own,  but  holding  itself  out  as  willing  to  loan  the  funds 
of  others  who  will  entrust  their  property  to  it;  but  in  such 
a  process  there  would  be  no  assurance  of  the  wise  use  of  the 
funds  so  deposited,  or  their  return  at  the  appointed  time. 
And  for  the  sake  of  having  loanable  funds  at  the  opening  of 
the  bank,  and  a  fund  to  safeguard  those  who  will  trust  their 
money  to  its  use,  a  capital  fund  of  its  own  is  necessary.  The 
trouble  with  many  of  the  old  State  banks  was  the  lack  of 
capital,  except  in  the  form  of  promises,  and  debts  cannot 
long  be  paid  by  promises.  And  inasmuch  as  banking  is  a 
credit  operation,  and  the  bank  a  credit  machine,  it  must  have 

38 


BANK  ORGANIZATION  AND  ADMINISTRATION  89 

credit  before  it  can  operate  profitably  and  successfully,  and 
to  do  this  capital  is  necessary  and  a  surplus  or  guaranty 
fund  quite  as  much  so. 

To  organize  a  bank,  therefore,  there  must  be  an  accumu- 
lation of  capital  which  has  already  been  gathered  by  individ- 
uals. As  a  basis  of  its  own  credit  this  is  absolutely  essen- 
tial. To  allow  a  body  of  men  to  receive  deposits  without 
some  property  back  of  their  promises  would  be  foolhardy, 
and  the  law  stipulates  how  much  capital  there  shall  be,  and 
regulates  the  capital  to  the  place  where  the  bank  operates. 
This  is  fundamentally  wrong,  for  the  capital  should  not  be 
adjusted  to  the  place  but  to  the  volume  of  business.  But  it 
works  out  fairly  well,  for  as  a  broad  proposition  a  country 
bank  will  not  have  the  growth  that  will  attend  a  city  bank. 

A  national  bank  was  chartered  in  Oklahoma  to  operate 
on  the  outskirts  of  Oklahoma  City.  The  capital  by  law 
was  but  $25,000.  In  the  expansion  of  the  city  the  territory 
was  included,  and  the  bank  became  a  city  bank,  and  sought 
to  operate  on  its  old  capital.  The  Comptroller  of  the  Cur- 
rency forbade  it  to  continue  to  do  business  under  its  old  cap- 
ital, and  suit  was  brought,  and  it  was  held  that  it  must  make 
its  capital  conform  to  its  new  environment,  the  logical  result 
being  that  in  a  large  city  its  deposit  liabilities  would  in- 
crease faster  than  in  a  rural  setting,  and  result  in  a  top- 
heavy  and  unsound  condition.  The  law  contemplates  that 
there  shall  be  some  proportion  between  capital  and  liabil- 
ities. 

THE  MEN  BEHIND 

A  bank  is  merely  an  aggregation  of  men  and  it  can  be 
no  better  than  its  men.  A  bank  never  goes  wrong  of  itself; 
it  goes  wrong  because  of  the  men  behind  it.  It  may  be 
due  to  any  one  of  several  causes,  but  failure  is,  in  the  last 
analysis,  the  failure  of  men. 

"There  is  no  question  that  we  as  business  men  cannot 
solve,"  said  a  boastful  young  man  just  organizing  a  bank. 
And  not  one  of  the  organizers  was  a  banker  by  training  or 
instinct,  and  yet  they  proposed  to  run  a  bank  without  the 
assistance  of  any  experienced  bank  man.  But  they  found — 
as  will  others — that  the  rules  that  apply  to  business  in  some 
forms  will  not  fit  banking;  and  to  be  able  to  run  a  factory  is 
not  to  be  capable  of  running  a  bank. 


40  THE   PRACTICAL  WORK  OF   A   BANK 

Most  of  all  the  men  must  be  those  who  will  inspire  con- 
fidence. They  must  have  "made  good"  in  their  own  lines 
and  bear  a  reputation  for  honesty,  sagacity  and  business 
prudence.  The  man  who  has  been  "tricky"  in  business;  who 
has  roade  money  by  unsavory  methods;  who  has  the  gam- 
bler's instinct  and  cannot  draw  the  line  between  other  peo- 
ple's money  and  his  own,  has  no  place  in  banking.  And  yet 
such  men  get  in  by  the  force  of  the  dollar,  and  often  carry 
their  bank  down  when  they  must  get  out. 

» 

A  SURPLUSAGE  or  BANKS 

If  he  who  makes  two  blades  of  grass  grow  where  but  one 
grew  before  is  a  philanthropist,  what  shall  be  said  of  the 
man  who  plants  two  banks  where  only  one  ought  to  exist; 
and  by  creating  the  second  makes  them  both  unprofitable 
and  great  success  impossible?  There  are  many  towns  where 
one  bank  could  serve  every  need,  and  would  grow  into  a 
healthy  size;  and  along  comes  a  professional  organizer,  or  a 
disgruntled  stockholder,  or  an  ambitious  fellow,  and  starts 
another.  And  they  both  just  manage  to  exist.  Of  the 
making  of  banks  there  seems  to  be  no  end. 

But  this  is  not  to  say  there  should  not  be  a  bank  in  every 
community.  The  great  development  of  this  country  is  due 
to  its  independent  banking  system,  where  under  liberal 
rules  as  to  capitalization  every  little  town  and  hamlet  that 
can  raise  the  necessary  capital  can  have  its  bank.  But  the 
first  essential  to  the  organization  of  a  bank  is  that  it  shall 
have  a  fair  chance  of  success.  And  how  some  banks  manage 
to  live  and  pay  the  modest  rent  and  the  salary  of  the  cashier 
and  a  dividend  large  enough  to  satisfy  the  directors  and 
stockholders,  is  a  mystery. 

THE  CHARTER 

The  organization  of  a  bank  is  a  legal  matter  that  must 
follow  certain  prescribed  lines,  and  conform  to  legal  re- 
quirements. The  National  Banking  Act  and  the  various 
State  laws  prescribe  just  what  steps  are  necessary  in  ordef 
to  form  a  bank.  There  must  first  be  the  association  of  a 
certain  number  of  men,  usually  five  or  more,  who  unite 
themselves  together  for  such  purpose  and  apply  for  a  char- 


BANK  ORGANIZATION  AND  ADMINISTRATION  41 

ter.  The  application  must  be  made  to  the  Comptroller  of 
the  Currency,  if  a  national  bank  and  to  the  State  depart- 
ment which  has  banks  in  charge,  if  a  State  institution.  This 
is  generally  called  the  banking  department,  and  the  official, 
"Superintendent  of  Banks," ""Auditor"  (Illinois),  "Com- 
missioner of  Banking  and  Insurance"  (New  Jersey),  or 
"Commissioner  of  Banking"  (Massachusetts).  The  in- 
formation generally  required  is  the  names  of  the  proposed 
incorporators,  the  name  (which  must  not  duplicate  or  con- 
fuse with  any  existing  bank  in  the  same  jurisdiction),  the 
place  of  business  and  the  amount  of  capital.  The  latter  is 
important,  and  the  law  usually  stipulates  what  the  capital 
shall  be  for  various  places,  it  being  the  intent  that  the  cap- 
ital shall  be  large  in  large  places  and  small  in  small  places. 
For  national  banks  the  minimum  is  $25,000  in  country 
places,  while  in  some  States  in  the  South  and  West,  State 
banks  may  be  formed  with  capital  as  low  as  $10,000. 

Upon  filing  the  application  for  charter,  certain  formali- 
ties are  necessary  as  to  advertising,  so  that  the  banking 
world  and  especially  the  bank's  competitors  in  the  same  dis- 
trict may  be  apprised  of  the  fact.  Duplicate  papers  must 
also  be  filed  in  the  county  clerk's  office,  as  matters  of  record. 
The  State  official  in  charge  of  banks*  then  looks  into  the 
matter  to  assure:  (a)  That  the  incorporators  are  acting  in 
good  faith;  are  representative  men  of  business,  whose  con- 
nection with  a  bank  will  bring  credit  and  probable  success 
to  the  institution;  (b)  that  it  has  a  fair  chance  of  success; 
and  (c)  that  the  capital  requirements  have  been  complied 
with;  for  it  is  essential  that  the  bank  have  the  capital  fund 
really  in  hand  before  opening  its  doors  and  transacting 
business.  Under  the  old  State  regime,  banks  would  organ- 
ize with  capital  only  in  the  form  of  promissory  notes,  and 
promises  are  a  poor  foundation  on  which  to  build  a  bank. 

The  process  necessary  to  establish  a  bank  differs  mate- 
rially in  the  different  States,  so  that  specific  description 
would  be  futile,  and  those  interested  in  the  subject  must  re- 
fer to  original  sources  for  directions  in  forming  a  bank,  and 
follow  the  law  most  carefully.  But  when  formalities  are 
complied  with  there  will  be  forthcoming  the  charter  which 
authorizes  the  corporation  to  transact  a  banking  business. 

*In  national  banks,  the  Comptroller  of  the  Currency. 


42        THE  PRACTICAL  WORK  OF  A  BANK 

THE  BOAED  OF  DIEECTOKS 

Having  received  permission  to  do  a  banking  business, 
the  organization  of  the  board  of  directors  follows,  these  be- 
ing elected  by  the  stockholders.  The  directors  choose  the 
executive  officers,  who  will  have  actual  charge  of  the  ad- 
ministration of  the  bank.  The  magna  charta  of  the  bank  is 
its  by-laws.  These  are  its  working  rules  and  principles.  It 
is  important  that  they  be  complete,  comply  with  the  law, 
and  cover  all  possible  operations  in  general  principles. 

Inasmuch  as  the  stockholders  own  the  bank,  they  are  the 
controlling  factors.  They  elect  the  directors  and  the  direct- 
ors elect  the  officers,  and  the  officers  select  the  clerical  staff. 

The  qualifications  for  director  in  a  bank  differ  in  the  va- 
rious States,  but  the  general  qualification  is  that  he  shall 
own  a  certain  number  of  unpledged  shares  of  stock  of  the 
bank,  and,  in  addition,  must  control  enough  votes  to 
elect  him.  As  a  rule,  the  first  directors  are  named  in  the 
certificate  of  organization,  these  serving  as  the  first  board 
until  their  successors  are  chosen. 

The  administration  of  a  bank  centers  in  the  board  of 
directors,  the  court  of  last  resort,  presided  over  by  the  pres- 
ident. Of  late  years  there  has  been  a  growing  tendency  to 
create  something  like  a  "president  emeritus"  office,  designat- 
ed as  "chairman  of  the  board,"  the  object  of  which  is  to 
honor  one  who  by  long  service  has  won  his  spurs  and  desires 
to  withdraw  from  the  active  management  of  the  bank,  but 
still  hold  a  rein  over  the  institution.  He  is,  in  a  large  meas- 
ure, an  advisory  officer,  a  "big  man,"  and  one  whose  counsel 
in  matters  of  finance,  both  within  and  without  the  bank,  is 
respected. 

The  directors  operate  through  committees  of  various 
sorts,  the  principal  one  of  which  is  the  loan  committee, 
whose  function  is  to  pass  on  loans  and  discounts,  and  whose 
judgment  may  make  or  break  the  bank.  It  is  customary  to 
delegate  certain  prerogatives  to  the  attending  officers,  and 
permit  them  to  make  loans  up  to  a  designated  amount  with- 
out reference  to  the  committee;  or  to  grant  a  line  of  dis- 
count to  a  certain  individual  or  firm,  it  being  the  function 
of  the  attending  officers  to  see  that  the  line  is  kept  within 
the  limits. 

It  not  infrequently  happens  that  the  president  is  the 


BANK  ORGANIZATION  AND  ADMINISTRATION          48 

dominating  force  of  the  bank,  and  his  judgment  obtains.  If 
he  is  a  man  of  sound  judgment,  a  student  of  business  af- 
fairs, he  is  often  trusted  with  the  management  of  the  bank 
without  much  supervision  on  the  part  of  the  directors  or 
loan  committee.  In  fact,  he  is  often  the  bank,  and  domi- 
nates its  policies  absolutely.  And  it  sometimes  happens 
that  he  rules  with  such  an  iron  hand  that  he  not  only  dom- 
inates the  bank,  but  wrecks  it.  More  than  one  bank  has 
gone  to  the  wall  because  its  president  insisted  upon  a  cer- 
tain line  of  action,  and  either  in  his  eagerness  to  build  up 
the  bank  or  in  his  ambition  or  indiscretion  in  other  lines,  ill- 
advised  or  too  liberal  credits,  brought  his  bank  to  disaster. 

THE  "ONE-MAN"  BANK 

The  "one-man"  bank  has  been  the  subject  of  many 
pointed  remarks.  It  is  everywhere  to  be  found.  It  exists  in 
the  little  hamlet,  and  in  the  big  city.  The  one  man  may  be 
the  cashier,  the  president,  a  director,  or  what  not,  but  he 
dominates  the  bank,  either  by  force  of  will  or  force  of 
money,  or  force  of  neglect  on  the  part  of  other  men. 

This  condition  is  so  aptly  set  forth  by  Mr.  Oscar  Tell- 
ing, National  Bank  Examiner  and  Chief  of  Reports  Divi- 
sion of  the  Comptroller's  Office  at  Washington,  that  I  quote 
him  at  length.  In  an  address  before  Washington  Chapter 
of  the  American  Institute  of  Banking,  he  said: 

"The  examiners  and  the  Comptroller's  Office  alike  dread 
the  so-called  'one-man  bank,'  conveniently  placed  in  one  of 
the  following  classes: 

"First— The  family  bank. 

"Second — The  bank  whose  board  is  dominated  by  an  in- 
dividual, usually  an  active  officer,  who  controls  the  annual 
election  by  owning  a  control  of  the  stock  or  obtaining  such 
control  with  the  assistance  of  the  'dummy'  stockholder  who 
gives  his  proxy  for  the  asking. 

"Third — The  bank  whose  board  is  dominated  by  a  'com- 
munity of  interests.'  By  the  expression  'community  of  in- 
terests' I  wish  to  be  understood  as  defining  a  condition  usu- 
ally brought  about  by  the  dominating  influences  on  the 
board,  or  their  financial  associates,  borrowing  an  undue 
amount  of  the  bank's  funds.  In  common  parlance,  being  a 
case  of  'you  scratch  my  back  and  I  will  scratch  yours'  or 
'the  pouring  of  the  bank's  funds  into  one  pot.' 


44  THE    PRACTICAL  WORK  OF   A   BANK 

"The  shadow  lines  of  these  three  classes  of  banks  so  com- 
pletely overlap  each  other  as  to  make  it  difficult  to  locate 
the  exact  line  of  demarcation,  but  when  trouble  comes  it 
usually  spells  disaster  to  all  concerned.  Although  theoreti- 
cally the  stockholders  elect  the  directors,  who  in  turn  elect 
or  appoint  the  active  officers,  in  actual  practice  just  the  re- 
verse is  true,  especially  in  the  'one-man  bank.' 

"The  individual,  the  family,  or  the  community  of  inter- 
ests, as  the  case  may  be,  elect  the  directors,  the  result  of 
which  election  is  the  most  grotesque  of  all  hybrid  financial 
creatures — 'the  dummy  director.' ' 

THE  PRESIDENT 

The  president's  duties  may  be  simple  or  complex.  He 
may  spend  his  time  running  the  bank  or  in  reading  the  daily 
paper.  He  may  draw  ten  thousand  for  knowing  how,  or 
nothing  for  doing  nothing.  He  may  be  a  banker  or  he 
may  be  a  farmer.  He  may  be  aged  and  infirm  or  young 
and  active.  He  may  be  the  bank  or  only  part  of  it;  but  he 
has  certain  duties  defined  by  law,  among  which  are:  to  sign 
certain  papers;  to  attest  certain  reports  and  to  preside  at 
the  meetings  of  the  board.  He  has  the  by-laws  as  his  guide 
and  can  make  his  office  a  big  one  or  a  little  one  as  he 
chooses. 

As  a  broad  proposition  bank  presidents  are  chosen  be- 
cause of  their  success  in  other  callings.  Few  grow  up  in  the 
ranks,  for  most  of  the  reputed  wealth  of  bank  presidents 
has  been  made  in  some  other  line  than  banking.  "He  made 
good  as  a  druggist  and  they  made  him  a  banker,"  is  the  key 
to  many  a  bank  president's  enviable  reputation.  And  if  he 
made  good  as  a  druggist  he  might  make  good  as  a  presi- 
dent. And  again  he  might  not.  It  depends  upon  how  near 
the  bank  he  runs  can  be  run  like  the  drug  store  he  ran.  One 
such  made  good,  did  good  and  was  good,  both  as  a  druggist 
and  as  a  banker. 

THE  VICE-PRESIDENT 

The  vice-president  is  next  to  the  president  in  power, 
often  takes  his  place  and  acts  in  his  stead.  In  large  banks 
there  are  many  vice-presidents,  who  are  active  officers,  hav- 


BANK  ORGANIZATION  AND  ADMINISTRATION          45 

ing  certain  duties  to  perform.  Some  act  as  credit  men,  out- 
of-town  representatives,  chief  clerks,  etc.,  and  are  part  of 
the  every-day  organization  of  the  bank. 

In  large  banks  the  work  of  various  departments,  such 
as  the  credits,  the  securing  new  business,  the  foreign  ex- 
change, the  transits,  the  investments,  the  buying  of  paper, 
and  other  matters  of  management,  are  frequently  delegated 
to  vice-presidents,  who  are  often  specialists  chosen  because  of 
business  and  social  connections.  It  is  not  uncommon  for  a 
bank  to  elect  an  officer  from  a  certain  section  largely  be- 
cause of  his  banking  connections  in  that  section.  For  in- 
stance, a  bank  may  want  Southern  business,  and,  therefore, 
elects  to  a  vice-presidency,  or  some  other  office,  the  secretary 
of  a  Southern  bankers'  association,  who  capitalizes  his  ac- 
quaintance among  banks  and  bankers. 

BANKS  AND  BANKS 

There  are  bank  officers  and  bank  officers.  Some  will  take 
authority  or  assume  it,  and  act  without  being  told  by  a  com- 
mittee. Such  are  men  of  initiative  who  do  things.  There 
are  others  who  fear  to  assume  any  responsibility,  to  say 
;<yes"  or  "no"  to  a  proposition,  to  take  an  aggressive  stand, 
or  any  stand  at  all,  and  always  refer  all  matters  to  some 
other  one,  or  to  the  board. 

And  there  are  boards  and  boards.  Some  will  be  con- 
tent to  delegate  the  actual  running  of  the  bank  to  the  offi- 
cers— where  it  belongs — and  be  content  to  supervise,  hold- 
ing the  officers  responsible  for  results  and  not  the  process 
by  which  they  were  obtained.  There  are  boards  that  will 
not  allow  an  executive  to  buy  a  bill  of  stationery  without 
referring  the  same  to  them;  and  others  who  never  delve  into 
such  details  at  all.  In  fact,  they  should  not ;  for  if  an  officer 
be  fit  to  be  an  officer,  he  is  fit  to  assume  some  responsibility. 
And  responsibility  makes  executives. 

THE  CASHIER 

Ordinarily  the  cashier  is  the  "big  man"  of  the  bank,  par- 
ticularly in  small  places.  He  is  at  the  bank  all  the  time, 
and  to  him  all  matters  are  referred.  He  is  sometimes  an 
executive  and  sometimes  a  combination  of  executive  and 


46        THE  PRACTICAL  WORK  OF  A  BANK 

clerk.  In  country  places  he  not  only  signs  the  official  docu- 
ments, and  directs  the  workings  of  the  bank,  but  also  acts  as 
teller,  bookkeeper  and  collection  clerk.  He  may  be  simply 
a  clerk  with  a  title. 

Like  a  good  housewife,  he  is  usually  busy  with  many 
things  about  the  bank.  He  takes  the  minutes  of  the  board 
meetings,  makes  reports  of  various  kinds,  interviews  cus- 
tomers, protests  checks,  signs  drafts,  passes  upon  loans,  and 
is  the  managing  head  of  the  bank.  The  daily  statement  is 
his  guide  to  the  condition  of  the  bank,  and  he  watches  two 
things  particularly:  the  reserve  and  the  loans.  He  is  spe- 
cially charged  with  keeping  the  bank  within  the  law  in  its 
reserve  requirements.  He  is  paid  to  run  the  bank,  some- 
times to  get  new  business,  and  to  show  a  profit  at  the  end 
of  the  year.  Doing  this,  he  need  not  worry. 

Whether  the  management  is  by  the  president,  or  a  vice- 
president,  or  cashier;  and  whether  there  is  one  vice-president 
or  ten,  matters  not — the  bank  must  be  managed;  and  in 
this  management  is  the  secret  of  the  atmosphere  that  sur- 
rounds it.  It  may  be  one  of  good  will  and  helpfulness, 
broadmindedness,  kindness;  or  it  may  be  one  of  ill  will, 
jealousy,  meanness  and  littleness. 

In  "The  Bankers  Magazine"  for  June,  1914,  the  author 
expressed  himself  on  the  subject  of  bank  management,  writ- 
ing under  the  caption,  "Ink  Spots  on  the  Ledger,"  which 
was  published  anonymously.  He  here  takes  the  credit  for 
the  authorship  of  the  article. 

THE  INK  SPOTS  ON  THE  LEDGER 

There  is  a  story  current  in  banking  circles  of  a  voucher 
check  returned  to  the  drawer  by  a  Western  bank,  with  an 
inkspot  on  it,  which  resulted  in  the  resignation  of  several  of- 
ficials and  ultimately  the  establishment  of  a  rival  institution. 

Just  how  the  blot  got  there,  or  what  the  wrathy  and 
irritated  depositor  did  to  cause  the  upheaval,  is  not  public 
property;  but  the  fact  remains,  the  incident  caused  a  tem- 
pest in  a  teapot  and  the  pot  boiled  over. 

Perhaps  the  blot  was  inadvertently  made,  as  many  are, 
and  could  not  be  erased.  Perhaps  it  was  carelessness  on  the 
part  of  some  clerk.  It  may  have  been  due  to  an  antiquated 
inkwell,  full  of  dust  and  clotted  ink.  It  may  have  been  a 
scratchy  pen;  it  may  have  been  spite. 


BANK  ORGANIZATION  AND  ADMINISTRATION  47 

DON'T-CABE  SPOTS 

Ink  spots  are  often  "don't-care  spots";  and  for  the  don't 
care,  there  may  be  a  reason.  Take  a  live,  energetic  bank 
man,  full  of  vim  and  vigor,  willing  to  work  his  head  off  to 
get  somewhere ;  hungry  for  recognition  and  success ;  anxious 
to  please  the  powers  that  be ;  spending  his  spare  time  in  self- 
improvement — take  such  a  fellow  and  criticise  everything  he 
does;  praise  nothing  he  accomplishes;  belittle  his  learning 
(which  may  be  greater  than  his  critic's) ;  drive  him  in  a  cor- 
ner and  break  his  spirit  with  a  bale-stick  of  abuse,  and  like 
the  high-spirited  horse  that  has  had  the  bale-stick  applied,  he 
may  mind  you  thereafter  with  fear  and  trembling,  but  it  will 
be  a  service  of  fear  and  not  loyalty. 

Perhaps  he  has  worked  hard  and  faithfully,  believing 
that  merit  would  find  its  reward;  and,  believing  in  himself 
and  in  his  job,  has  fitted  himself  for  larger  and  better 
things,  and  knows  he  can  rise  to  the  occasion  and  make 
good  when  the  opportunity  arrives.  It  comes.  With  eager 
anticipation  he  awaits  the  outcome,  only  to  find  some  fa- 
vored son  of  some  favored  sire  in  the  job  he  should  have 
had,  and  the  ink  spot  is  one  of  hate. 

Perhaps  familiarity  has  bred  contempt;  and  knowing 
him  from  a  little  boy  up,  the  administration  has  forgotten 
that  little  boys  sometimes  grow  up  to  be  men.  His  accom- 
plishments and  his  talents  may  be  underestimated,  or  for- 
gotten, or  seen  at  too  close  range  to  get  the  proper  perspec- 
tive, and  in  looking  for  a  man  he  is  overlooked. 

Perhaps  some  jealous  mortal  in  the  same  institution  has 
concluded  that  danger  lies  ahead  of  him  (or  her)  if  this 
aspiring  youngster  climbs  up,  and  by  skillful  maneuvering 
convinces  the  judge  and  jury  that  it  is  for  the  best  interests 
of  the  bank  that  no  clerk  shall  ever  get  out  of  the  underling 
class.  In  some  banks,  therefore,  a  Chinese  wall,  unsealed 
and  unscalable  by  any  in  the  ranks,  separates  the  office  from 
the  force,  and  the  ink  spots  on  the  ledgers  are  ink  spots  of 
despair. 

Do  you  wonder  that  men  do  careless  work  when  their 
initiative  is  killed,  their  hope  gone?  Do  you  wonder  that 
men  learn  to  hate,  when  hatred  is  in  the  air?  Do  you  won- 
der that  men  become  anarchists  when  the  only  door  of  hope 
seems  through  a  little  hole  in  the  ground  in  a  quiet  church- 
yard, which  cures  many  ills? 


48        THE  PRACTICAL  WORK  OF  A  BANK 

Do  you  wonder  that  under  conditions  such  as  are  sug- 
gested above  (and  they  do  exist)  the  men  should  not  care? 
Why  should  they  care,  when  no  one  cares  for  them?  Like 
begets  like.  Some  men  cannot  be  driven;  most  men  can  be 
won.  A  spirit  of  kindness  and  good-will  will  do  more  by 
far  to  generate  a  spirit  of  loyalty  than  all  the  bale-sticks  in 
the  world. 

THE  OPTIMIST'S  "GOOD  MORNING" 

A  certain  bank  in  New  York  took  on  a  new  clerk.  The 
president  came  in.  "Good  morning,  Mr.  President,"  said 
the  youngster,  with  boldness  and  courage. 

"No  one  here  says  'good  morning'  to  me,  and  don't  you 
begin  it,"  was  the  tart  reply.  The  messenger  quit  his  job, 
and  the  president  should  have  quit  his. 

Not  long  ago  there  died  a  man  of  the  opposite  stamp. 
He  was  a  member  of  one  of  the  big  Wall  Street  firms.  He 
was  on  friendly  terms  with  every  man  in  the  office.  He  had 
a  cheery  smile  and  a  greeting  for  everyone  from  the  porter 
up.  Ajid  when  he  died  they  had  a  memorial  dinner  with  a 
vacant  chair,  and  more  than  one  eye  was  moist  as  they  re- 
membered the  man. 

BOWLING  ALLEYS  AND  CHOCOLATES 

Imagine,  if  you  can,  the  spirit  that  animates  the  institu- 
tion whose  president  put  in  a  set  of  bowling  alleys  for  the 
boys,  and  bowls  with  them!  Or  the  atmosphere  of  another 
where  several  boxes  of  chocolates  are  kept  in  a  cupboard 
where  the  boys  may  help  themselves  (at  a  cent  apiece),  the 
profits  going  to  charity.  Contrast  this  with  the  institution 
whose  executive  officer  (a  big  man  in  his  own  estimation) 
goes  around  with  note-book  in  hand  and  huge  specs  on  his 
nose,  seeking  whom  he  may  devour.  Or  another  where  the 
spirit  of  espionage  is  so  cruel  that  a  false  motion  of  a  teller 
is  likely  to  be  taken  for  theft. 

Ink  spots  on  the  ledgers?  No,  first,  ink  spots  on  the 
hopes  and  ambitions  of  men;  then  ink  blots  on  their  work. 

"Cut  deep  enough,"  said  Napoleon  to  his  surgeon,  "and 
you'll  find  the  Emperor."  Cut  deep  enough,  Mr.  Banker, 
and  in  every  clerk  you'll  find  a  man.  And  to  get  the  best 
out  of  him  you  must  recognize  his  aim  (if  he  has  any — and 


BANK  ORGANIZATION  AND  ADMINISTRATION          49 

if  he  hasn't  any,  give  Mm  one)  and  encourage  his  ambition, 
engender  hope  and  create  an  atmosphere  of  good-will.  To 
the  good  man  whose  work  avails  naught  there  comes  de- 
spair, deep  and  bitter.  He  may  be  to  blame;  you  may  be  to 
blame.  But  when  he  concludes  that  good  work  gets  him 
nothing,  and  poor  work  can  do  him  no  more  harm,  he  is  apt 
to  say,  "Well,  what's  the  use?" — and  this  is  the  beginning 
of  the  ink-spot  period  of  life,  where  work  is  a  grind  and 
life  a  dull,  desultory  thing. 

For  the  man  who  is  careless,  there  is  no  excuse.  Gentle 
admonition  first,  then  warning,  then  a  vacant  stool.  But  the 
fault  as  often  lies  without  the  man  as  within.  And  the  man 
higher  up  is  frequently  so  perfect  in  his  own  estimation,  so 
infallible  in  his  judgment,  so  unerring  in  his  conclusions,  and 
so  kind  ( ?)  withal,  that  to  hold  up  a  mirror  and  show  him 
what  sort  of  a  chap  he  really  is,  is  to  invite  the  bale-stick,  and 
bale-sticks  break  men  as  well  as  horses. 

"THE  FAULT,  DEAR  BRUTUS" 

But  there's  another  side  to  the  question.  The  fault  with 
this  maker  of  ink  spots  may  not  lie  with  his  superiors,  but 
with  himself,  that  he  is  an  underling.  He  may  not  have 
seen  his  opportunity.  He  may  be  so  close  to  himself  that 
he  cannot  see  himself.  His  eyes  may  have  been  on  the  cal- 
endar and  clock  instead  of  on  his  work.  When  pay-day 
takes  a  man  by  surprise,  some  day  he'll  be  surprised  on  pay- 
day. Good  bank  men  are  not  paid  by  the  hour,  but  by  the 
job.  Perhaps  our  disgruntled  friend  has  been  frittering  his 
time  away  dabbling  in  a  thousand  and  one  things  outside  his 
institution.  While  every  man  should  have  a  wholesome 
hobby  and  be  a  man  among  men,  and  have  an  interest  in  all 
that  goes  to  make  life  worth  while,  still  his  job  should  be  the 
thing  of  his  life. 

He  may  be  working  on  the  false  theory  that  he  has  a 
mortgage  on  the  job  ahead  just  because  he  has  a  life  lease 
on  the  job  behind.  The  job  ahead  does  not  always  go  to  the 
man  behind,  for  the  man  behind  the  man  behind  may  be  so 
much  better  qualified  that  he  jumps  the  job  ahead  into  the 
job  ahead  of  the  job  ahead. 

Then  again  he  might  be  so  puffed  up  over  himself  that 
to  give  him  any  more  honor  or  responsibility  would  simply 


50  THE   PRACTICAL  WORK  OF   A   BANK 

burst  the  boiler  of  self-conceit.  Two  bank  officers  in  New 
York  openly  boast  that  they  know  so  much  that  they  don't 
need  books!  And  their  very  boast  is  the  measure  of  the 
men.  When  a  wise  man  gets  into  the  company  of  his  supe- 
riors, he  keeps  quiet,  listens  and  learns — the  fool  talks. 

Self -judgment  is  a  bad  thing.  It  is  biased.  It  is  un- 
fair. Our  man  may  have  analyzed  his  desire  to  get  up  for 
ability  to  make  good.  His  longing  for  notoriety  may 
simply  be  mistaken  for  ambition.  The  despair  he  sometimes 
feels  may  be  due  to  bad  digestion,  bad  disposition,  cigar- 
ettes, drink,  laziness.  What  he  needs  may  not  be  a  raise, 
but  a  long  walk.  Not  all  failures  are  due  to  official  mis- 
judgment,  however  much  the  rank  and  file  may  disagree 
with  the  executives  in  their  conclusions. 

But  granting  that  banking  is  full  of  heartaches  and 
heart  breaks,  some  just  and  others  imaginary,  nevertheless 
the  man  who  can  do  good  work  under  adverse  conditions, 
and  keep  sweet  and  wholesome,  is  bound  to  win.  If  he  can't 
do  his  best  under  the  conditions  that  surround  him,  he  owes 
it  to  himself  to  get  another  job.  Round  men  never  fit  into 
square  holes.  But  the  man  who  can  smile  when  it  hurts,  and 
keep  sweet  when  others  are  sour,  hold  himself  in  check  when 
others  let  go,  and  do  good  work  when  the  temptation  is  to 
be  careless,  indifferent  and  cross,  has  in  him  some  of  the  ele- 
ments, at  least,  that  make  for  success.  Faithfulness,  loyalty, 
efficiency  and  length  of  service  count  for  much  in  banking; 
and  while  the  few  can  sit  before  the  roll-top  and  pass  on 
loans,  all  can  help  in  keeping  the  machine  running  smoothly 
and  efficiently,  doing  its  best  work,  for  out  of  efficient  ser- 
vice come  salaries,  dividends  and  promotions. 

THE  HOUSE  IN  WHICH  IT  LIVES 

After  obtaining  a  charter  and  electing  the  board  of  di- 
rectors and  selecting  the  officers,  it  follows  that  the  next 
thing  is  to  provide  the  bank  with  a  home.  Few  banks  start 
with  a  building  erected  especially  for  them  or  by  them,  it 
being  against  good  banking  principles  to  make  an  invest- 
ment in  real  estate  that  has  a  limited  utility  so  soon;  it 
should  be  built  from  the  bank's  earnings,  and  not  out  of 
capital  investment.  A  great  many  banks  have,  however, 
opened  their  doors  in  a  building  erected  especially  for  their 


BANK  ORGANIZATION  AND  ADMINISTRATION          61 

use,  sometimes  out  of  their  own  funds  and  frequently  by 
syndicates  formed  in  the  board  of  directors  who  erect  and 
equip  the  building,  taking  as  remuneration  a  certain  rental, 
usually  on  a  sliding  scale,  so  that  as  the  bank  grows  the 
rental  charge  will  grow  with  it. 

To  discuss  the  relative  merits  of  different  bank  arrange- 
ments, the  lay-out,  the  equipment,  the  vaults,  etc.,  is  quite 
beside  the  scope  of  the  present  work,  there  being  much  in- 
formation on  the  subject  to  be  had  when  the  occasion  re- 
quires. There  are  firms  which  now  specialize  in  bank  equip- 
ment and  bank  buildings,  and  will  contract  to  erect  the 
building,  furnish  the  working  fixtures  even  down  to  the  ink 
wells,  and  deliver  the  same  ready  for  business.  There  are 
other  concerns  that  specialize  on  bank  vaults  and  their  con- 
struction. Others  specialize  on  bank  interior  arrangement, 
viewed  from  the  standpoint  of  utility,  and  any  bank  con- 
templating the  erection  of  a  new  building  will  do  well  to 
consult  with  these  firms,  inasmuch  as  their  experience  is 
wide  and  their  judgment  good,  and  there  are  numerous 
little  "kinks"  that  will  help  in  the  work  of  the  day,  and 
make  the  machinery  run  the  more  smoothly. 

More  and  more  banks  are  realizing  the  advertising  value 
of  a  good  outfit.  It  impresses  the  public.  It  looks  stable.  It 
looks  prosperous.  There  are  some  large  and  powerful  banks 
housed  in  quarters  that  are  totally  inadequate  and  unsuited 
to  the  dignity  and  standing  of  the  bank,  just  as  there  are 
some  wealthy  men  living  in  modest  homes;  but  the  bank  is 
entitled  to  good  quarters.  It  pays  to  dress  well,  individually 
and  corporately.  This  is  not  to  say  that  the  bank  should 
squander  its  money  as  some  have  no  doubt  done,  but  it 
should  have  the  setting  that  is  compatible  with  dignity. 

THE  BANKING  ROOM 

Marble  and  bronze  are  quite  largely  used  for  the  counter 
screen  and  lobby  fittings,  and  steel  desks  and  filing  cabinets 
are  replacing  wood.  The  object  is  twofold:  To  eliminate  the 
risk  of  fire  and  to  beautify.  One  large  savings  bank  in 
New  York  has  no  other  protection  for  its  records  than  its 
fireproof  building,  erected  for  its  own  use,  and  keeps  all 
books  of  records  in  steel  cases,  in  the  open  room.  The 
chances  of  fire  are  very  remote,  if  not  entirely  negligible. 


-LXKLL?   N010NIUCVM 


52 


NIVW 

A    MODERN    BANKING   ROOM 


BANK  ORGANIZATION  AND  ADMINISTRATION          58 

The  tellers  are  arranged  with  the  idea  of  being  accessible 
to  the  public,  but  protected  by  wire  cages  and  bronze  grat- 
ings, the  doors  of  the  former  being  self-closing,  and  locked 
from  the  inside  so  that  access  can  be  had  only  by  consent  of 
the  teller. 

Some  years  ago  a  package  of  money  amounting  to  a  con- 
siderable sum  disappeared  from  a  trust  company  in  New 
York.  It  vanished  as  completely  as  if  the  earth  had  swal- 
lowed it.  The  teller's  cage  had  been  locked;  no  one  but  he 
had  been  in  during  the  day,  except  an  officer,  and  where  and 
how  it  got  away  still  remains  a  mystery  so  far  as  the  public 
records  are  concerned.  It  is  the  custom  not  to  allow  anyone 
back  of  the  screen  but  officers  and  clerks  whose  employment 
takes  them  within  the  cage.  It  is  a  necessary  protection  to 
the  teller.  It  is  also  a  growing  custom  to  place  the  officers 
where  they  are  readily  accessible  to  the  public,  usually  sep- 
arated only  by  a  hand-rail. 

It  would  seem  that  in  a  bank  of  discount  with  assets  of 
two  hundred  million  and  more,  the  tellers  would  be  very 
busy  men.  They  are;  but  it  is  safe  to  say  that  the  sav- 
ings bank  teller  in  a  bank  of  one-eighth  the  size  is  a  much 
busier  man  with  the  public.  The  reason  is  that  banks  of 
discount  do  not  carry  the  same  proportionate  number  of  ac- 
counts as  do  savings  banks.  A  savings  bank  with  $25,000,000 
of  deposits  will  have  over  50,000  accounts;  while  a  bank  of 
discount  of  the  same  size  may  not  have  five  thousand.  Of 
course,  the  latter  are  all  active  and  require  much  more  de- 
tailed labor  to  handle  than  do  the  fifty  thousand  in  the  sav- 
ings bank,  but  the  work  of  the  latter  is  over  the  counter, 
while  the  work  of  the  bank  of  discount  is  largely  through 
the  clearing-house  and  the  mails.  Therefore,  the  lobby  of 
the  savings  bank  will  be  a  busy  place,  while  the  lobby  of  the 
bank  of  discount  will  often  be  practically  deserted.  To 
prove  this,  go  into  any  goodly  sized  savings  bank  on  Mon- 
day— the  busy  day  of  the  week.  You  will  find  long  lines, 
mostly  women.  Go  into  a  bank  of  discount  of  the  same  size, 
and  you  will  find  perhaps  half  a  dozen  men,  or  boys,  mes- 
sengers of  business  houses,  etc.,  delivering  stocks  and  bonds, 
obtaining  certifications,  making  collections,  deposits  and  va- 
rious other  errands.  This  statement  does  not  apply,  how- 
ever, to  banks  doing  a  large  commercial  business,  or  those 
operating  savings  departments,  where  the  crowd  is  really  » 


maic 


UJTTTTT    T 


54 


PLAK    OF   JIASEMLNT    IK    A    MODEHK    BAKJ 


BANK  ORGANIZATION  AND  ADMINISTRATION          55 

savings  bank  crowd  and  not  commercial  depositors;  nor  to 
the  large  "commercial  banks."  The  foregoing  remarks  are 
particularly  true  of  large  city  banks,  which  deal  mostly  with 
large  concerns  and  have  a  few  active  and  large  accounts, 
rather  than  a  host  of  small  ones.  There  are,  of  course,  banks 
of  discount  which  have  a  large  number  of  small  depositors, 
because  of  their  situation  in  retail  districts,  which  makes  an 
active  counter  trade.  But  the  teller  of  the  bank  of  discount 
has  much  greater  responsibilities  than  does  the  teller  of  a 
savings  bank,  for  as  will  be  shown  in  the  chapter  on  that 
subject,  his  work  is  involved  with  much  banking  law.  He 
must  pass  judgment  on  many  matters  that  are  peculiar  to 
his  position.  He  must  take  risks  that  the  savings  bank  teller 
never  assumes.  He  handles  more  checks  in  a  day  than  the 
savings  bank  man  does  in  a  month;  and  in  the  handling  of 
checks  there  is  always  risk. 

The  lobby  is,  therefore,  arranged  according  to  the  needs 
of  the  bank.  Some  would  want  a  large  space,  especially  if 
they  ever  expected  to  run  a  "Christmas  club,"  which  would 
bring  thousands  of  depositors  to  the  bank  every  week;  a 
smaller  one  if  their  business  was  largely  through  the  mail 
and  clearing-house. 

Many  New  York  banks  have  the  bookkeeping  staff  away 
from  the  main  room,  sometimes  on  an  upper  floor,  with  di- 
rect communication  by  means  of  telephone,  telautograph, 
elevator,  tube,  etc. 

This  is  done  on  account  of  the  space  saved  for  the  lobby, 
officers  and  tellers,  as  well  as  to  reduce  the  rental  for  ex- 
pensive ground  floor  space,  and  also  to  avoid  the  confu- 
sion that  follows  the  click  of  many  adding  machines  and 
typewriters.  But  whatever  the  arrangement  there  must  be 
quick  and  silent  communication  between  the  bookkeepers 
and  tellers,  so  that  depositors'  balances  may  be  verified  with- 
out acquainting  the  customers  with  the  fact  that  the  account 
is  being  looked  up. 

Special  attention,  and  properly  so,  is  given  to  vault 
equipment,  it  being  not  only  the  bank's  strong  box,  but  also 
its  show  place  and  frequently  its  silent  partner,  when  boxes 
are  rented  out. 

VAULTS 

A  whole  book  might  be  written  about  vaults  and  their 
construction,  and  to  trace  the  evolution  from  the  wooden 


56        THE  PRACTICAL  WORK  OF  A  BANK 

chest  with  a  few  iron  bands,  and  two  or  three  padlocks,  to 
the  massive  modern  vault,  with  walls  two  feet  thick  consist- 
ing of  layers  of  steel  bolted  together,  a  filling  of  concrete,  in 
which  steel  rails  are  embedded,  doors  three  feet  thick,  inner 
chests,  steam  jets  so  arranged  as  to  fill  the  space  with  live 
steam  in  a  few  moments,  and  in  which  no  man  could  live, 
electric  wires  connecting  with  the  outer  world,  and  so  ar- 
ranged that  to  bore  a  hole  as  big  as  a  silver  quarter  would 
bring  the  police,  would  be  interesting  reading,  and  for  such 
information  the  reader  is  referred  to  works  on  the  subject 
of  vaults  and  safe-deposit  operations.  Suffice  it  to  say  here 
that  modern  vault  making  is  an  art,  and  as  the  science  has 
progressed,  burglary  methods  have  improved,  so  that  good 
vault  equipment  is  a  proper  investment  and  brings  its  ample 
return. 

The  custom  now  is  to  build  money  vaults  within  easy  ac- 
cess of  the  tellers,  and  record  vaults  within  easy  access  of  the 
bookkeepers,  and  storage  vaults  for  the  storage  of  records 
and  papers  in  some  cellar  or  sub-cellar,  where  space  is  not 
so  valuable. 

An  important  and  quite  necessary  official  in  the  bank  is 
the  guard.  He  stands  in  the  lobby  and  directs  customers 
where  to  go  for  the  service  they  need.  He  answers  ques- 
tions. He  can  be  a  mighty  force  in  making  the  customers 
feel  at  home.  He  is  sometimes  a  special  officer,  and  in  case 
of  any  attempt  at  fraud  would  be  empowered  to  make  an 
arrest. 

Some  men  have  the  faculty  of  being  polite  yet  not  offi- 
cious ;  serving  and  yet  not  appear  to  serve ;  humble  yet  digni- 
fied ;  useful  yet  not  important ;  out  of  the  way  yet  in  the  way 
when  wanted.  There  is  one  such  in  New  York,  in  a  bond 
house — a  colored  man.  He  will  inquire  your  business,  take 
your  hat  and  coat,  ask  you  to  have  a  seat,  hand  you  a  paper, 
take  your  message,  carry  your  card ;  usher  you  into  the  place 
you  want  to  go  with  the  grace  of  a  Beau  Brummel,  and  yet 
do  it  so  smoothly,  so  unofficiously,  so  acceptably  withal,  that 
j^ou  immediately  feel  that  here  is  a  real  gentleman,  and  here 
a  good  firm;  and  you  like  to  come  back. 

There  is  "Philip"  of  the  First  National  Bank  of  Bos- 
ton. He  is  so  admirably  described  and  so  delightfully  pic- 
tured by  a  depositor  in  that  institution,  that  I  have  consid- 
ered it  a  classic  and  worthy  of  perpetuation. 


BANK  ORGANIZATION  AND  ADMINISTRATION          67 


PHILIP  — AN   INSTITUTION 

(An  Appreciation  by  a  Depositor) 

WHENEVER  I  enter  or  leave  the  First  National  Bank 
of  Boston  I  am  sure  to  receive  a  courteous  greeting 
and  smile  from  Philip.  Philip  is  the  gentleman  of 
color  who  officiates  upon  the  main  floor,  answers  questions, 
and  directs  strangers  to  their  proper  anchorage. 

He  wears,  in  addition  to  his  smile,  a  smart  uniform  of 
blue  with  white  gloves,  and  West  Point  itself,  even  upon  a 
field  day,  does  not  boast  of  a  more  soldier-like  personage. 

Any  bank  can  take  and  safeguard  your  money,  and  even 
pay  it  out  to  you  again  on  demand.  Any  bank  can,  upon  the 
presentation  of  proper  collateral,  make  you  a  loan,  and  there 
are  many  other  conveniences  and  courtesies  which  can  be  ex- 
tended; but  there  is  only  one  bank,  to  my  knowledge,  that 
possesses  a  Philip.  "Philips,"  like  poets,  are  born  and  not 
made,  and  so  there  will  never,  even  during  bumper  crop  sea- 
sons, be  many  of  them.  Philip  has  that  rare  quality  of  not 
knowing  or  appearing  to  know  what  manner  of  man  or  woman 
you  are.  To  Philip  every  person  entering  or  leaving  this  (I 
came  near  saying  his)  bank  is  a  potentate  and  deserving  of 
all  the  courtesy  and  attention  supposedly  due  a  potentate. 

It  makes  no  difference  to  him  whether  my  clothes  are 
ready-made  and  old  or  the  latest  creation  of  a  master,  whether 
I  am  about  to  deposit  millions  or  seek  a  small  loan — I  am  a  vis- 
itor and  a  customer,  and  am,  therefore,  entitled  to  instant  rec- 
ognition and  courtesy  or,  if  I  require  it,  attention  and  help. 

In  a  bank,  capital  and  surplus  are  necessary;  officers  with 
brains  and  business  acumen  are  necessary;  conveniences  and 
assistance  are  a  part  of  the  service  you  expect;  clerks  and 
tellers  must  naturally  be  in  attendance.  But  besides  and  be- 
yond all  these  there  is  something  more  to  be  desired,  and 
Philip  supplies  it.  Cold  winds  may  blow  or  summer's  sun 
beat  down,  rains  may  descend  and  floods  come,  but  the  cheer- 
ful smile  and  inherent  good  nature  of  Philip  are  undis- 
turbed. Like  the  brook,  they  go  on  forever.  Most  of  us  are 
very  human,  and  we  may,  at  times,  be  scant  with  our  courtesy, 
yet  kindliness  on  the  part  of  others  we  never  fail  to  observe 
and  appreciate.  The  little  things  of  life  are  important.  A  par- 
ticle of  grit  may  not  wreck  the  machinery  of  a  great  estab- 
lishment, but  it  disturbs  smoothness,  and  makes  the  cylin- 
ders knock.  A  lubricant  is  a  fine  thing  to  have  handy  when  the 
gears  grind.  Philip  helps  supply  the  "grease."  He  makes  things 
run  easier,  he  saves  "horse-power,"  he  helps  us  to  the  best  of  his 
ability  to  conserve  our  energy.  What  the  world  needs  is  more 
kindness;  what  the  individual  needs  is  more  patience;  and 
what  banks  need  is  a  Philip,  for  he  is  more  than  a  faithful 
watchman,  more  than  an  efficient  servant — he  is  an  institution. 


CHAPTER  V. 

DEPOSITS    AND    THE    RECEIVING    TELLER 

It  was  said  in  a  former  chapter  that  one  of  the  functions 
of  a  bank  is  to  receive  deposits.  A  bank  with  the  aver- 
age capitalization  would  prove  a  poor  investment  for  the 
stockholders  and  a  poor  asset  to  the  community  if  it  had 
only  its  own  capital  with  which  to  work,  for  the  income 
from  the  capital  investment  would  barely  pay  expenses.  It, 
therefore,  invites  deposits,  it  seeks  deposits,  it  pays  *for  de- 
posits and  sometimes  buys  deposits.  In  fact,  some  banks 
pay  too  much  for  deposits  (allow  too  much  interest  or  on 
too  liberal  terms),  compete  with  other  banks  by  unsafe 
methods,  and  so  come  to  grief. 

Bank  profits  come  largely  from  loans  and  investments, 
and  in  order  to  lend  money  the  bank  must  have  money.  If 
it  has,  as  we  have  seen  before,  a  dollar  in  money,  it  can  lend 
four  dollars  in  credit.  It  can  receive  interest  on  four  dol- 
lars and  only  pay  interest  on  one.  Some  bank  men  fail  to 
grasp  this  fact,  in  theory,  although  they  practice  it.  Most 
banks  have  more  deposits  than  capital.  The  deposits  earn 
dividends  for  the  capital,  and  it  is  good  banking  to  attract 
all  the  deposits  possible  and  pay  as  little  for  them  as  is 
necessary. 

NEW  YORK  THE  DEPOSIT  CENTER 

By  virtue  of  the  fact  that  New  York  is  the  commercial 
arid  money  center  of  the  country,  and  particularly  by  rea- 
son of  the  fact  that  there  is  always  a  demand  for  money  to 
"carry"  Stock  Exchange  loans — meaning  that  money  can 
be  loaned  on  demand  or  call  in  New  York  at  any  time  at  a 
price,  sometimes  high  and  sometimes  low,  but  always  at 
some  rate;  and  by  reason  of  its  being  a  Central  Reserve 
City  under  the  National  Banking  Act,  money  from  all 
parts  of  the  country  finds  its  way  to  New  York  from  out-of- 
town  banks  when  there  is  no  use  for  funds  in  the  country 
districts.  These  deposits  of  country  banks  constitute  their 
reserves.  The  interest  on  these  reserve  balances  varies. 

*In  service  and  other  reciprocal  arrangements. 
68 


THE    RECEIVING    TELLER  59 

but  is  usually  around  two  per  cent. ;  and  when  money  is  un- 
employed in  other  parts  of  the  country,  it  is  sent  to  New 
York,  either  for  loaning  out  for  the  bank's  account,  or  de- 
posited with  the  city  bank  on  interest  according  to  agree- 
ment. 

THE  COMPETITION  FOR  BANK  DEPOSITS  KEEN 

The  competition  for  these  balances  is  extremely  keen, 
banks  operating  departments  whose  sole  duty  is  to  solicit 
such  accounts.  Recently  it  was  announced  that  a  promi- 
nent New  York  bank  would  be  absorbed.  Within  a  few 
days  another  bank  had  fifteen  men  out  in  various  parts  of 
the  country  soliciting  the  accounts  that  the  first-mentioned 
bank  was  carrying,  it  being  possible  for  one  bank  to  know 
approximately  who  the  depositors  of  the  other  banks  are  by 
keeping  record  of  checks  that  pass  through  its  hands.  Some 
banks  make  this  a  settled  policy.  And  by  all  manner  of 
means  such  as  convention  attendance,  advertising,  service  of 
various  sorts,  personal  acquaintance,  corporate  connection, 
etc.,  deposits  are  sought,  and  secured,  sometimes  under 
duress. 

In  soliciting  a  country  bank's  account,  particular  stress 
is  laid  upon  the  facilities  of  the  city  correspondent  to  serve 
the  country  bank,  especially  in  the  line  of  furnishing  credit 
information.  It  will  supply  data  regarding  borrowers,  buy 
paper  for  its  correspondents,  care  for  securities,  make  loans, 
collect  checks  on  agreed  terms,  and  render  all  manner  of 
little  services  in  return  for  the  balance,  and  sometimes  agree 
to  send  the  bank  a  certain  amount  of  business,  such  as  collec- 
tion of  notes,  drafts,  checks,  etc.,  in  a  certain  district,  that 
will  be  a  distinct  profit.  It  is  a  case  of  one  serving  the 
other  and  the  results  to  the  city  bank  are  shown  in  the 
total  deposits. 

DEPOSITORS  POSSIBLE  BORROWERS 

It  is  an  axiom  of  banking  that  a  good  borrower  is  as 
much,  if  not  more,  benefit  than  a  good  depositor.  And 
much  importance  attaches  to  the  customer  being  a  probable 
borrower.  In  fact,  the  bank  wants  him  to  borrow;  it  is 
profitable  to  both  that  he  should.  And  since  his  borrowing 
is  part  of  the  deposit  plan,  it  must  be  ascertained,  in  the 


60  THE   PRACTICAL  WORK  OF   A   BANK 

first  instance,  that  he  is  a  desirable  customer  before  he  is 
allowed  to  open  an  account  and  on  the  strength  thereof 
become  a  borrower. 

OPENING  AN  ACCOUNT 

Everyone  who  approaches  the  teller  of  a  bank  of  dis- 
count and  expresses  a  desire  to  open  an  account  is  not  re- 
ceived; first,  for  the  reason  that  the  bank  may  have  rules  as 
to  the  minimum  balance.  Thus,  in  one  large  bank  in  New 
York  the  rule  is  that  a  balance  of  at  least  $5,000  must  be 
kept  or  they  do  not  want  the  account.  Other  banks  are  not 
so  harsh  in  their  rules,  but  will  generally  request  that  a  min- 
imum balance  be  maintained,  and  this  is  understood  when 
the  account  is  opened.  It  may  run  from  $50  in  a  country 
bank  to  from  $300  to  $500  in  city  banks;  but  the  bank  de- 
sires that  it  shall  be  able  to  make  a  profit  on  the  account, 
and  by  the  process  of  analysis  that  will  be  explained  in  the 
chapter  on  analysis  and  cost  accounting,  it  has  been  deter- 
mined that  an  account  that  does  not  show  a  certain  balance 
is  a  loss  to  the  bank,  for  to  it  must  be  charged,  theoretically, 
the  proportionate  cost  of  managing  the  bank,  rent,  heat,  col- 
lection costs,  etc.,  and  to  it  credited  the  interest  on  the 
money  available  for  investment.  And  for  the  privilege  of 
drawing  checks  and  having  the  bank  collect  the  checks  de- 
posited, the  bank  is  by  all  the  rules  of  equity  entitled  to  a 
profit. 

While  the  applicant's  pedigree  is  not  inquired  into  as 
closely  in  a  bank  of  discount  as  in  a  savings  bank,  a  proper 
identification  is  essential.  The  applicant  may  be  introduced 
by  another  depositor,  or  someone  known  to  the  bank's  offi- 
cials, but  no  conservative  bank  will  open  an  account  with 
those  who  do  not  come  properly  introduced. 

A  card  of  introduction  is  often  necessary  and  always 
desirable,  for  banks  are,  as  a  rule,  not  given  to  opening  ac- 
counts with  strangers.  So  many  frauds  have  been  prac- 
ticed upon  banks  by  those  who  have,  with  or  without  intro- 
duction, opened  accounts  and  then  used  the  medium  thus  af- 
forded to  work  a  fraud  and  bring  loss  to  the  bank,  that 
banks  in  large  cities,  especially,  now  require  introduction 
before  laying  themselves  liable  to  frauds  possible  in  banking 
•arith  strangers. 


THE    RECEIVING    TELLER  61 

Signatures  are  taken  on  as  many  cards  as  the  bank  has 
departments  wherein  the  signature  will  be  verified.  The 
officers  may  have  one  card,  the  tellers  another  and  the  book- 
keeping department  another.  In  the  case  of  corporations 


GETS  $3,400  ON  $34  CHECK. 

Brooklyn     Police    Seek     Man    Who 

Raised   Watchman's   Pay    Draft. 

A  forger  who  raised  a  "pay  check  is- 
sued by  the  Ocean  Parkway  Building 
Company  from  $34  to  $3,400  and  collect- 
ed the  money  is  sought,  by  the  Brook- 
lyn police. 

The  check,  payable  to  a  night  watch- 
man employed  by  the  company,  was 
lost  in  the' street.  The  finder  added  two 
ciphers,  opened  an  accoufil  with  a  Ipcal 
trust  company,  and  later  deposited  "the 
raised  check. 

On-  Saturday  last  toe  Xorger  -drew  V>ut 
the  entire  '"deposit.  -The  police  say 
that  they  have  a  clue  ttJ'Ufe  man  and 
expect  to  arrest  hirfti, 

THE    REASON    BANKS  ABE    LOTH   TO    OPEN    ACCOUNTS    WITH    STRANGERS, 
AND     INCIDENTALLY    TO     SHOW     THE     RISKS    OF     BANKING.       THE 

BANK   CAN  ONLY  CHARGE  THE    MAKER  THE  ORIGINAL  AMOUNT. 

FROM    NEW    YORK    TIMES,   DEC.    16,   1914. 

arid  banks,  all  the  officers  who  are  authorized  to  sign  will 
affix  their  signatures  to  the  cards,  and  the  bank  will  some- 
times ask  for  a  copy  of  the  by-laws  which  give  the  corpora- 
tion's rules  as  to  the  signing  of  checks,  together  with  a 
statement  showing  who  the  officers  are  and  when  elected 
and  for  what  term,  this  statement  being  certified  to  by  the 
secretary  or  officer  other  than  the  ones  empowered  to  sign. 
After  taking  signature,  business  address,  etc.,  a  pass-book 
is  made  out,  check-book  furnished  and  account  opened  on 
the  ledger. 

THE  BANK  AND  ITS  DEPOSITORS 

Right  here  it  may  be  well  to  stop  for  a  time  to  consider 
the  relation  that  exists  as  soon  as  the  bank  has  thus  opened 
account  with  a  depositor.  It  is  a  settled  principle  of  law 
that  the  relation  between  a  bank  and  its  depositors  is  that 
of  debtor  and  creditor;  meaning  to  say,  the  bank  by  accept- 
ing the  account  and  the  money  and  negotiable  instruments 
that  will  be  deposited  from  time  to  time,  becomes  the  legal 
owner  of  the  same,  and  simply  agrees  to  repay  the  amount 
upon  demand. 


62  THE   PRACTICAL  WORK  OF   A   BANK 

So  many  people  have  the  idea  that  the  bank  is  custodian 
—bailee — of  the  funds.  They  speak  of  having  so  much 
money  in  the  bank,  forgetting  that  they  have  nothing  in  the 
bank,  but  do  have  a  credit  on  its  books,  and  what  they  hold 
is  an  "account  payable"  of  the  bank.  The  bank  in  law  and 
practice  agrees  to  pay  the  sum  on  deposit  to  the  parties  and 
in  the  amounts  ordered  by  the  depositor,  and  he  has  the  right 
to  recall  his  orders  to  pay  at  any  time  prior  to  the  actual 
payment;  i.  e.,  to  "stop  payment"  on  his  checks,  and  this  is 
frequently  done. 

THE  PASS-BOOK 

The  depositor's  pass-book  is  his  evidence  of  the  deposit. 
In  it  are  entered  the  deposits  and  sometimes  the  payments. 
In  order  that  the  bank  may  not  be  held  liable  for  deposits 
entered  as  cash,  which  are  in  reality  merely  collection  items, 
and  to  have  it  distinctly  understood  that  all  checks  are  re- 
ceived subject  to  collection,  and  only  become  cash  when  col- 
lected, many  banks  now  have  a  statement  in  their  books  to 
the  effect  that  "Checks  and  drafts  are  received  and  credited 
subject  to  the  following  agreement:  This  bank  assumes  no 
responsibility  for  the  collection  of  checks,  and  reserves  the 
right  to  withhold  payment  on  checks  drawn  against  uncol- 
lected  funds,  and  reserves  the  right  to  charge  back  any 
checks  not  paid,  or  the  remittances  for  them  that  are  not  re- 
ceived. The  bank  also  reserves  the  right  in  its  discretion  to 
send  items  to  the  drawee  bank  direct  for  payment,  and  when 
so  sent  the  above  conditions  are  still  assented  to." 

Another  form  reads:  "This  bank  in  receiving  out-of-town 
checks  and  other  collections  acts  only  as  agent  of  the  depos- 
itor, and  does  not  assume  any  responsibility  beyond  due  dili- 
gence, and  the  same  care  it  uses  in  collecting  its  own  paper." 

Still  another  form  has  it  as  follows:  "This  bank  receives 
collections  and  deposits  only  on  the  following  conditions,  to 
wit:  This  bank  shall  be  bound  to  use  no  more  than  ordinary 
diligence  in  endeavoring  to  make  collection  of  any  item  left 
with  it  for  collection  or  by  it  passed  to  the  credit  of  any  cus- 
tomer. It  shall  not  be  liable  for  the  neglect  or  failure  of  the 
channels  or  parties  to  or  through  which  such  item  has  to  be 
sent;  nor  shall  it  be  liable  for  the  returns  received  thereon 
until  such  returns  have  been  cashed.  And  in  case  of  loss  on 
any  item  for  failure  to  collect  or  failure  of  returns,  this  bank 


THE    RECEIVING    TELLER  68 

shall  be  entitled  to  charge  such  loss  back  to  its  customer  or 
to  collect  the  same  from  the  customer  at  once." 

It  frequently  happens  that  a  bank  will  accept  a  check  on 
deposit   on   an  out-of-town  institution,   and   collection   is, 


NOTICE 


This  book  is  to  be  used  only 
for  the  entry  of  deposits. 


A  statement  of  the  account  and  can- 
celled  vouchers  will  be  returned  to  each 
depositor  on  or  about  the  first  of  every 
month. 


In  collecting  out  of  town  items  this 


vond  thp  fxercise  of  due  diligence 


Please  notify  us  immediately  of  any 
change  in  your  address. 

Guaranty  Trust  Company 
of  New  York 


NOTICE  OF  TERMS  ON   WHICH  DEPOSITS  ARE   RECEIVED  PRINTED  IN   THE  PASS   BOOK 

therefore,  necessary  through  the  mails,  and  before  returns 
come  in  the  collecting  bank  fails.  The  instrument  may  be 
correct  in  every  respect,  and  no  question  as  to  its  goodness 
arises ;  the  loss  is  due  to  the  collecting  agent.  It  would  seem 
proper  that  the  bank  should  charge  the  check  back  to  its  de- 
positor; but  where  no  definite  agreement  is  made  as  to  the 
liability  assumed  in  such  matters,  in  some  jurisdictions  it  is 


64  THE   PRACTICAL  WORK  OF   A   BANK 

held  that  the  bank  is  sort  of  a  sub-agent  in  the  matter  and 
not  agent.  And  in  such  a  case,  where  the  bank  fails  to  make 
the  collection  through  the  fault  of  its  correspondent,  it  is 
held  liable.  In  other  States  it  is  held  that  in  receiving  an 
out-of-town  check  on  deposit  and  for  collection,  the  bank  is 
agent  for  the  depositor  and  the  correspondent  banks  are  its 
sub-agents,  and  if  any  of  these  fail  before  remittance  is  re- 
ceived, the  loss  is  the  depositor's  and  not  the  bank's,  provided 
it  has  used  reasonable  diligence  and  care  in  selecting 
its  correspondents. 

The  latter  view  would  seem  to  be  the  most  reasonable 
and  fair.  Depositors  must  know  that  a  bank  cannot  guar- 
antee the  collection  of  checks  deposited.  It  must  collect  the 
same  through  the  usual  channels  and  depositors  are  bound 
to  know  the  course  of  such  transactions.  And  if  the  bank 
uses  care  and  judgment  in  sending  the  check  for  payment, 
no  liability  should  attach  if  the  chain  breaks  before  the  funds 
are  in  hand. 

Banks  should  in  all  cases  have  it  plainly  stated  on  their 
pass-books  and  deposit  slips  that  they  assume  no  liability 
until  funds  are  received;  but  that  the  bank's  position  may  be 
clear,  notice  to  depositors  should  be  given,  as  above  noted. 

THE  RECEIVING  TELLER 

The  individual  with  whom  the  depositor  comes  into  con- 
tact most  frequently  is  the  receiving  teller.  While  most  of 
the  checks  that  are  drawn  by  depositors  are  paid  through 
the  clearing-house  or  through  the  mails,  the  deposits,  as  a 
rule,  all  go  through  the  receiving  teller's  window,  except  it 
may  be  those  made  by  mail,  and  these  are  not  in  great  num- 
ber if  we  omit  those  remittances  in  the  nature  of  deposits, 
but  which  are  rather  collection  items,  that  come  from  corre- 
spondents, and  which  go  through  a  separate  department  in 
the  large  banks.  These,  of  course,  are  an  important  part  of 
the  bank's  work,  and  constitute  a  very  large  portion  of  the 
liabilities  in  many  cases,  but  they  are  not  over-the-counter 
deposits  such  as  we  now  have  in  mind.  In  smaller  banks, 
however,  the  mail  deposits  go  thrcfugh  the  teller's  cash. 

While  the  officers  meet  the  borrowers  from  time  to  time 
the  teller  is  apt  to  meet  all  patrons,  sooner  or  later,  and  can 
do  much  to  make  his  bank  popular  with  its  clients.  Here 


THE    RECEIVING    TELLER 


65 


courtesy  is  a  real  asset.  It  will  riot  do  to  watch  the  clock  too 
closely,  for  the  day's  work  cannot  be  measured  by  the  hour. 
While  a  bank  should  close  as  promptly  as  it  opens,  and 
should  not  encourage  its  depositors  in  the  habit  of  coming  at 


HEW     ACCOU1IT      TELLERS'      RECORD     QASD. 


A  CAHD  FOR  KEEPING  RECORD  OF  BUSINESS  SECURED  THROUGH   FRIENDS  OF  THE'  BANK 

any  time  of  the  day  and  expect  to  find  it  open,  there  should 
be  reasonable  allowance  for  delays  incident  to  business,  and 
if  the  window  has  to  be  opened  for  a  late  comer,  do  it  with 
a  smile. 

THE  TELLER  AN  IMPORTANT  PERSONAGE 

It  is  apparent  that  the  receiving  teller  is  important  in  the 
role  he  plays.  He  meets  the  customers.  It  is  his  concern  to 
treat  them  right;  to  be  pleasant,  yet  avoid  conversation. 
He  must  bind  the  customer  to  the  bank  by  the  quality  of  his 
service  as  he  binds  the  bank  in  the  acts  he  performs  con- 
stantly. Let  him,  therefore,  be  careful.  And  it  is  to  re- 
mark here  that  the  teller  should  so  conduct  himself  as  to 
make  a  good  impression.  He  should  not  dress  gaudily,  wear 
much  jewelry,  or  use  tobacco  in  business  hours.  He  should. 


66        THE  PRACTICAL  WORK  OF  A  BANK 

most  of  all  keep  clean  hands.  In  making  deposits,  the  cus- 
tomer is  very  apt  to  watch  the  receiving  teller  closely,  and 
if  he  is  unkempt,  it  is  quickly  noticeable,  and  neatness  is  an 
asset  for  its  own  sake.  And  remember,  that  it  is  not  neces- 
sary to  wear  a  diamond  to  carry  prestige.  A  smile  will  do 
as  well  and  costs  less. 

The  receiving  teller  is  sort  of  an  educational  medium.  To 
him  falls  the  duty  of  instructing  his  depositors  in  the  proper 
method  of  making  out  tickets,  endorsing  checks,  sorting 
money,  etc.,  and  with  the  cooperation  of  the  depositors,  much 
of  the  annoyance  of  badly  prepared  deposits  may  be 
avoided. 

THE  WORK  OF  THE  RECEIVING  TELLER 

The  work  of  the  receiving  teller  resolves  itself  into  two 
main  functions:  (a)  To  prove  the  deposit  ticket  and  re- 
ceipt for  items  so  received;  and  (b)  to  sort  the  checks  and 
currency  into  groups  before  turning  over  to  other  depart- 
ments. He  is  accountable  for  all  funds  received  by  him  un- 
til they  are  surrendered.  The  cash  which  he  takes  in  is  de- 
livered to  the  paying  teller,  or  to  some  officer  who  has  charge 
of  the  cash.  The  checks  on  banks  in  town  go  to  the  clearing- 
house department;  other  items  on  local  banks  to  the  collec- 
tion department;  the  out-of-town  items  to  the  transit  de- 
partment. And  thus,  he  receives  his  deposits,  makes  his  own 
records  and  distributes  the  items  all  over  the  bank,  and  his 
day  ends  as  it  began  without  cash  in  his  drawer. 

In  a  small  bank  the  receiving  teller  after  receipting  for 
the  amounts  in  the  customers'  pass-books,  sorts  the  items  into 
city  and  foreign,  and  all  city  items  that  go  through  the 
clearing-house  are  listed  for  the  clearing.  Other  items  re- 
quiring presentation  by  runner  are  given  to  the  department 
that  has  charge  of  collections.  Items  out  of  town  are  sent  to 
correspondent  banks. 

The  teller  must  be  particular  about  many  things:  (a) 
That  his  money  is  correct  in  count.  The  bank  is  responsible 
for  whatever  he  receipts  for  to  the  depositor.  A  receiving 
teller  at  one  time  in  a  rush  could  not  handle  the  crowd  and 
took  a  deposit  and  laid  it  aside  to  prove  later,  giving  the  de- 
positor credit  on  the  book.  He  found  the  cash  $100  short 
ind  so  notified  the  depositor,  who  insisted  that  the  count  was 


THE    RECEIVING    TELLER  67 

correct  and  claimed  the  deposit  as  entered — and  got  it.  (b) 
That  his  money  is  genuine.  If  counterfeits  creep  in,  and  he 
cannot  trace  where  they  came  from,  the  bank  must,  of 
course,  lose,  (c)  That  checks  are  not  dated  ahead,  and  are 
indorsed ;  for  while  these  errors  might  not  result  in  loss,  they 
require  adjusting  with  the  depositor  and  cause  annoyance. 
Checks  are  often  dated  ahead,  or  dates  are  obscure  or 
omitted.  Often  they  lack  previous  indorsement  or  they  are 
indorsed  by  an  attorney  without  adequate  proof  of  his  au- 
thority. The  sum  in  the  body  of  the  check  may  not  corre- 
spond with  the  figures  or  may  be  entirely  missing. 

In  banking  transactions,  especially  in  Wall  Street  loans, 
it  frequently  becomes  important  to  know  the  exact  time  a 
deposit  was  received,  particularly  in  bankruptcy  proceed- 
ings. A  time  stamp  is  often  used  to  indicate  the  exact  time 
a  deposit  was  received  or  a  check  paid,  the  stamp  changing 
every  minute. 

GOOD  MONEY  AND  BAD 

It  is  a  first  requisite  of  a  receiving  teller  to  be  able  to 
distinguish  good  money  from  bad;  or  rather  bad  money 
from  good;  and  by  an  instinct  that  comes  from  long  hand- 
ling of  money  learn  to  know  bogus  money  by  touch.  It  is 
a  peculiar  fact  and  apropos  to  the 'subject  to  say  that  the 
author  in  an  experience  covering  thirty  years  in  banking 
never  had  the  pleasure  (?)  of  throwing  out  a  counterfeit 
bill.  It  may  have  been  due  to  his  ignorance  of  bad  money, 
or  it  may  have  been  due  to  the  honesty  of  the  patrons  of 
the  banks  in  question,  yet  the  fact  remains  that  in  three  in- 
stitutions under  his  observation  for  that  length  of  time,  less 
than  twenty-five  dollars  in  counterfeits  were  detected. 

To  become  an  efficient  teller,  take  your  counterfeit  de- 
tector and  study  page  by  page  by  comparison  with  genuine 
notes.  Take  a  strong  magnifying  glass  and  examine  the 
good  bills;  then,  locate  the  defects  on  the  counterfeits.  Go 
from  one  denomination  to  another  until  the  looks  of  the  gen- 
uine bills  and  the  weak  spots  of  counterfeits  are  engraved  on 
your  memory.  Then  you  know  where  to  look  for  the  vul- 
nerable spots  whenever  you  handle  money,  and  will  have  no 
need  to  scrutinize  the  bills  as  a  whole.  Another  good  prac- 
tice is  to  cut  out  all  newspaper  items  or  telegrams  relating  to 


68        THE  PRACTICAL  WORK  OF  A  BANK 

bad  money  and  how  banks  are  duped.  Paste  these  in  a  con- 
venient place  and  read  them  occasionally.  Experts  do  not 
judge  so  much  by  the  appearance  of  a  note  as  they  do  by  its 
feeling,  that  is,  by  the  way  it  slips  through  the  fingers;  but 
it  takes  years  of  experience  to  acquire  the  necessary  firm 
touch,  and  even  then  it  is  not  always  reliable. 

When  notes  are  received  that  are  counterfeit  it  is  the 
duty  of  the  receiving  teller  to  return  them  to  the  depositor 
at  once.  The  National  Bank  Act  requires  national  banks  to 
stamp  or  write  in  plain  letters  the  words  "counterfeit,"  "al- 
tered" or  "worthless"  on  all  fraudulent  notes  that  come  into 
their  possession.  There  is  sometimes  a  delicate  duty  to  per- 
form, when  the  teller  has  to  say  to  a  depositor  who  has  pre- 
sented a  note  that  is  fraudulent  that  he  must  stamp  and  re- 
turn it  to  him.  Of  course  the  object  of  so  doing  is  to  stop 
its  circulation.  And  this  is  naturally  unpleasant  to  the  cus- 
tomer— but  that  is  the  law.  In  many  cases  the  receiving 
teller  is  not  so  sure  that  the  note  is  a  counterfeit,  and  should 
he  make  a  mistake,  the  bank  would  be  liable  for  the  amount. 
The  error  can  be  remedied  easily  by  sending  the  note  for  re- 
demption stating  the  fact,  and  getting  a  new  one  from  the 
Government,  so  that  the  danger  of  loss  to  a  bank  ought  not 
to  deter  a  teller  from  performing  this  clearly  defined  duty. 
In  cities  where  there  are  sub-treasuries  it  is  the  general  cus- 
tom to  refer  all  doubtful  money  to  them  to  pass  upon. 

In  receiving  coin,  and  especially  gold,  one  is  inclined  to 
be  deceived  by  its  weight.  On  the  Pacific  Coast,  where  it  is 
in  more  general  use  than  in  the  East,  as  the  loss  from  abra- 
sion is  inevitable,  the  law  would  be  unjust  if  every  coin  fall- 
ing below  the  standard  weight  was  declared  uncurrent.  .On 
the  contrary,  it  expressly  provides  for  the  redemption  of 
coins  in  weight  within  certain  limits,  as  follows:  "Any  gold 
coins  of  the  United  States,  if  reduced  in  weight  by  natural 
abrasion,  not  more  than  one-half  of  one  per  cent,  below  the 
standard  weight  prescribed  by  law,  after  a  circulation  of 
twenty  years,  as  shown  by  the  date  of  coinage,  and  at  a 
ratable  proportion  for  any  period  less  than  twenty  years, 
shall  be  received  at  their  nominal  value  by  the  United  States 
Treasury  and  its  officers,  under  such  regulations  as  the 
Secretary  of  the  Treasury  may  prescribe,  for  the  protection 
of  the  Government  against  fraudulent  abrasion  or  other 
practices.  *  *  *  Any  gold  coin  in  the  Treasury  of  the  United 


THE    RECEIVING    TELLER  69 

States  when  reduced  in  weight  by  natural  abrasion  more 
than  one-half  of  one  per  cent,  below  the  standard  weight  pre- 
scribed by  law,  shall  be  recoined."  Coins  twenty  years  of 
age  may,  therefore,  be  one-half  of  one  per  cent,  below  the 
standard  weight  and  still  be  current.  A  coin  of  light  weight, 
unlike  a  counterfeit  note,  cannot  be  stamped  "light  weight" 
or  with  any  words  to  indicate  its  imperfect  character.  There 
is  no  law  permitting  anyone  to  so  mark  a  coin.  There  is  a 
provision,  however,  which  directs  that  "every  person  who 
fraudulently,  by  any  act,  way  or  means,  defaces,  imitates, 
impairs,  diminishes,  falsifies,  scales  or  lightens  the  gold  and 
silver  coins  which  have  been,  or  which  may  hereafter  be, 
coined  at  the  mints  of  the  United  States,  or  any  foreign  gold 
or  silver  coin  which  is  by  law  made  current  or  in  actual  cir- 
culation as  money  within  the  United  States,  shall  be  impris- 
oned not  more  than  two  years  and  fined  not  more  than 
$2,000."1 

MAKING  A  DEPOSIT 

The  first  thing  that  is  required  of  a  depositor  in  making 
a  deposit  is  to  make  out  a  deposit  slip.  This  is  an  original 
entry  in  the  eyes  of  the  law  and  an  important  document.  It 
is  the  bank's  record  of  what  the  depositor  offers  for  deposit. 

The  original  tickets,  after  the  receiving  teller  has  finished 
with  them,  are  passed  to  the  bookkeeper  and  then  filed.  They 
often  become  exceedingly  valuable  for  reference  in  case  dif- 
ferences and  misunderstandings  occur  as  to  credit  dealings 
with  depositors.  All  deposits  received  by  mail  must  have 
prompt  acknowledgment.  All  errors  and  discrepancies,  if 
not  discovered  at  the  time  of  deposit,  must  be  immediately 
advised  by  telephone,  if  possible,  in  the  case  of  city  cus- 
tomers, and  otherwise  by  letter. 

The  deposit  items  are  separated  into  bills,  gold,  silver 
and  checks,  some  banks  requiring  out-of-town  checks  to  be 
listed  separately  from  the  local  items,  in  order  that  the  ex- 
change charges  may  be  ascertained. 

In  presenting  a  deposit  the  depositor  should  use  care 
that  all  bills  are  right  side  up.  denominations  separate,  the 
large  bills  first,  and  checks  all  properly  indorsed,  on  the  left 
hand  end  as  the  check  is  turned  over.  Silver  should  be 

iHorace  F.  Fuller,  Receiving  Teller,  Second  National  Bank,  Boston,  before 
Boston  Chapter. 


70  THE   PRACTICAL  WORK  OF   A   BANK 

wrapped  in  standard  packages,  in  wrappers  which  the  bank 
will  furnish.  The  depositor's  initials  should  be  written  on 
the  rolls  of  silver  so  that  in  case  discrepancies  are  found  they 
may  be  corrected.  Bills  in  quantities  should  be  put  into 
standard  packages.  It  is  customary  to  strap  bills  in  units 
of  fifty  bills  in  each  package;  thus,  fifty  ones  and  twos 
(sometimes  thirty  ones  and  ten  twos) ;  fifty  fives,  making  a 
package  of  $250;  fifty  tens,  making  $500;  and  fifty  twen- 
ties, making  $1,000.  Small  change  is  wrapped  as  follows: 
Pennies,  25  cents  to  a  roll;  nickels,  $2;  dimes,  $5;  quarters, 
$10;  halves,  $10.  Gold  is  placed  in  bags  of  usually  $1,000 
each,  and  strongly  tied.  Silver  dollars  are,  as  a  rule,  placed 
in  bags  of  $100  each.  Customers  should  follow  the  bank's 
methods  in  this.  Some  banks  in  strapping  in  the  receiving 
cage  put  up  odd  amounts  for  payroll  purposes,  as,  for  in- 
stance, $125,  $150,  $175,  etc.,  in  fives  or  fives  and  tens.  Also 
even  hundreds  are  put  up  in  fives  and  tens  for  quick  use 
without  counting  when  they  are  paid  out. 

Coupons  offered  for  deposit  should  be  placed  in  coupon 
envelopes  with  the  name  of  the  depositor,  the  name  of  the 
company,  the  due  date,  the  number  and  denomination,  where 
payable,  and  total.2  Little  attention  is  paid  by  the  teller  to 
the  signature  on  checks,  except  checks  drawn  on  his  own 
bank,  it  being  more  important  that  the  check  be  properly  in- 
dorsed. He  cannot  know  the  genuineness  of  the  signature 
on  checks  drawn  on  other  banks,  but  can  know  the  last  in- 
dorsement. The  first  indorsement  should  be  the  same  as  on 
the  face. 

Where  there  is  any  doubt  regarding  the  instrument,  par- 
ticularly as  to  its  regularity  and  the  probability  of  its  being 
paid,  it  should  be  received  for  collection  and  not  entered  as  a 
deposit.  It  may  be  "short  extended,"  i.  e.,  entered  in  the 
inside  column,  with  memorandum  that  it  is  for  collection. 

THE  DEPOSITOR  SHOULD  MAKE  THE  TICKET 

The  reason  banks  require  customers  to  make  out  their 
own  tickets  is  to  have  first-hand  evidence  of  the  original 
transaction.  A  customer  might  claim  to  have  deposited  a 
certain  amount,  or  a  certain  check,  but  when  confronted  with 
the  deposit  ticket  in  his  own  writing  further  proof  is  not 
likely  to  be  required. 

2See  p.  903. 


THE    RECEIVING    TELLER  71 

Two  cases  will  illustrate  why  the  depositor  should  make 
his  own  ticket.  A  doctor  went  into  a  bank  and  offered  for 
deposit  a  single  bill,  claimed  to  have  been  $1,000.  The  clerk, 
who  had  never  seen  a  bill  of  that  denomination,  evidently 
mistook  it  for  a  $100  bill,  made  out  a  ticket,  and  gave  the 
doctor  credit  accordingly.  Without  looking  at  his  pass- 
book the  doctor  began  to  check  against  the  account  and 
soon  found  that  he  had  overdrawn  the  amount.  Upon  re- 
ceipt of  overdraft  notice  he  explained  the  transaction  and 
claimed  credit  for  the  additional  $900. 

The  deposit  slip  being  in  the  clerk's  handwriting,  and 
the  pass-book  calling  for  a  like  amount,  the  bank  insisted 
that  the  doctor  was  mistaken,  inasmuch  as  its  cash  balanced 
on  that  day.  Suit  was  subsequently  brought  and  only  be- 
cause the  doctor  could  prove  he  received  the  bill,  and  traced 
it  from  the  time  he  received  it  to  the  bank  counter,  did  he 
win  his  case.  Had  he  made  his  own  ticket,  the  error  would 
not  have  happened. 

In  another  case  a  woman  intended  to  send  $200  for  de- 
posit by  her  daughter.  Having  an  extra  $20,  she  decided 
to  make  it  $220,  but  said  nothing  to  the  daughter.  The 
latter  handed  it  in  as  $200 ;  the  teller  received  it  as  $200,  and 
where  the  $20  went  is  still  a  mystery.  The  woman  had  no 
other  proof  than  her  word,  and  the  teller  was  sure  it  was  but 
$200  when  he  counted  it.  It  was  embarrassing  on  both 
sides. 

When  the  receiving  teller  has  counted  the  money,  proven 
the  checks,  etc.,  the  amount  is  entered  in  the  pass-book.  As 
the  checks  are  verified  by  the  receiving  teller,  a  mark  is  made 
alongside  the  item  to  designate  its  class,  as,  for  instance,  "N. 
Y.,"  means  a  New  York  item,  "34"  a  check  on  Bank  No.  34 
in  the  clearing-house,  etc.  This  custom,  of  course,  varies 
with  the  banks.* 

When  a  customer  representing  a  branch  house  makes 
a  deposit,  a  duplicate  ticket  is  often  presented  to  be  stamped 
by  the  receiving  teller,  this  stamp  giving  the  date  and  the 
name  of  the  bank.  This  is  sometimes  forwarded  by  the  bank 
to  the  customer's  head  office. 

*Many  tellers  now  take  the  transit  number,  to  be  found  after  the  bank's  name 
on  all  checks  (see  Numerical  Transit  System),  to  indicate  the  bank  drawn  on; 
while  large  city  banks  make  no  check  at  all,  on  the  theory  that  the  depositor 
should  keep  a  record  of  his  check  deposits  for  his  own  protection. 


72        THE  PRACTICAL  WORK  OF  A  BANK 

CHECKS  FOR  DEPOSIT — INDORSEMENTS 

The  items  offered  for  deposit  will  be :  Checks  upon  banks 
in  the  same  city  and  clearing  through  the  clearing-house  or 
collectible  by  messenger  within  the  next  business  day;  checks 
on  out-of-town  banks:  coupons,  requiring  special  care  and 
registry  in  the  mails,  notes  falling  due,  and  other  instru- 
ments, such  as  drafts  upon  merchants,  drafts  with  bills  of 
lading  attached,  etc.  The  latter  are,  of  course,  segregated 
and  not  credited,  but  entered  for  collection,  either  by  the 
teller  or  by  the  collection  clerk.  The  busy  teller  has  no  time 
to  verify  indorsements  other  than  the  last.  At  times 
when  checks  are  rapidly  received  for  deposit  it  is  impossible 
to  examine  them  carefully;  hence  the  greater  need  of  looking 
at  the  indorsement  of  a  depositor.  When  checks  are  finally 
paid  by  the  drawee  institution,  errors  are  sure  to  be  de- 
tected, and,  of  course,  the  bank  receiving  them  ought  always 
to  know  from  what  source  they  came,  in  order  to  ascertain 
what  to  do.  Checks  should  be  endorsed  exactly  as  they  are 
drawn.  If  a  check  is  drawn  to  the  order  of  "William  B. 
Smith,"  it  should  be  endorsed  that  way  and  not  "W.  B. 
Smith."  If  the  name  is  wrong  or  wrongly  spelled,  then  in- 
dorse as  on  the  face  of  the  check  with  the  correct  name  un- 
derneath. If  a  check  is  endorsed  by  one  person  for  another 
under  power  of  attorney,  it  should  be  endorsed  by  the  princi- 
pal as  by  the  attorney,  and  the  power  lodged  as  evidence  of 
that  authority. 

It  is  permissible  and  often  obtains,  that  a  bank  will  re- 
ceive a  check  improperly  drawn  or  endorsed  to  be  passed  to 
the  credit  of  the  depositor.  If  it  goes  to  the  credit  of  the  de- 
positor it  can  only  be  drawn  by  check,  properly  signed,  and 
so  the  bank  is  protected  in  accepting  an  irregular  indorse- 
ment only  if  the  check  is  for  credit  to  the  account  of  the  de- 
positor. Checks  irregularly  indorsed  should  never  be  cashed, 
nor  is  it  fair  to  the  drawee  bank  to  pass  such  checks  on  with- 
out calling  attention  to  the  irregularity,  so  that  the  matter 
will  not  be  overlooked  when  it  reaches  the  place  of  payment. 

CORPORATION  CHECKS 

In  dealing  with  corporations,  the  receiving  teller  should 
be  careful  to  see  that  all  checks  are  endorsed  by  the  corpora- 


THE    RECEIVING    TELLER  78 

tion  and  not  by  an  officer  as  such.  A  proper  indorsement  is 
"The  Century  Company,  by  James  Smith,  Treas.,"  and  not 
simply  "James  Smith,  Treas."  And  a  receiving  teller  should 
never  accept  corporation  checks  for  credit  to  personal  ac- 
count. Suppose  the  above-named  treasurer  is  empowered  to 
endorse  checks,  and  to  draw  checks.  He  comes  in  with,  a 
check  drawn  by  himself,  as  treasurer,  to  his  own  order  and 
offers  the  same  for  deposit.  It  should  be  refused.  The  bank 
has  notice  on  its  face  that  the  treasurer  is  using  if  not  mis- 
using the  funds  of  the  company  for  his  personal  affairs.  If 
the  check  were  signed  by  two  other  officers  the  case  would 
be  different.  For  this  reason  certain  well-managed  bond 
houses  will  not  accept  in  payment  for  bonds  purchased 
through  them  the  checks  of  bank  officers  signed  by  them- 
selves, but  request  their  personal  check.  It  can,  therefore, 
never  be  charged  with  knowingly  accepting  bank  funds  for 
securities  sold  to  bank  officers. 

It  has  been  held  that  a  bank  is  liable  for  accepting 
checks  drawn  by  corporation  officers  to  their  own  order,  in 
such  a  way  as  to  carry  notice  of  irregularities  on  their  face. 
Such  checks  are  often  drawn  innocently  and  in  good  faith; 
but  if  the  matter  is  diplomatically  explained  to  the  depositor 
he  will  understand.  The  safe  way  in  dealing  with  corpora- 
tion officers  is  to  explain  the  rule  at  the  beginning,  so  that 
no  trouble  will  arise  on  this  score.  Checks  to  the  order  of 
corporation  officers  should  always  be  signed  by  one  other 
than  the  officer  interested  and  offering  the  same  for  deposit 
as  a  matter  of  sound  banking  policy.  Checks  drawn  by  one 
acting  in  a  representative  capacity  and  drawn  to  the  per- 
son's order  as  an  individual,  should  never  be  accepted  with- 
out careful  inquiry  as  to  the  right  of  the  one  so  drawing  to 
draw  to  his  own  order.  Thus,  an  executor  or  administrator 
of  an  estate  might  draw  to  his  order  as  an  individual  for  ex- 
penses or  other  charges,  and  it  might  be  perfectly  proper; 
but  the  check  has  notice  on  its  face  that  it  is  trust  funds  go- 
ing to  an  interested  party  and  should  be  verified  by  requir- 
ing court  sanction  to  the  transaction. 

It  has  been  held  that  if  a  check  is  offered  for  deposit  in 
the  same  bank  as  drawn  on,  and  credit  given,  the  credit  can- 
not be  rescinded,  as  the  teller  has  means  of  knowing  if  the 
check  be  good  or  not.  Therefore,  the  teller  should  be  wary 
as  to  how  he  credits  checks  drawn  on  his  own  bank. 


74        THE  PRACTICAL  WORK  OF  A  BANK 

THIRD  PARTY  INDORSEMENTS 

Third  party  endorsements  are  a  source  of  never-ending 
annoyance,  except,  of  course,  when  received  from  depositors 
of  long  standing  and  known  reliability.  For  the  benefit  of 
those  who  may  not  understand,  I  will  explain  that  a  third 
party  endorsement  is  another  endorsement  on  a  check  be- 
side the  depositor's.  If  a  check  is  drawn  to  the  order  of  a 
depositor,  it  may  be  received  on  deposit  and  placed  to  his 
credit  without  endorsement  of  the  payee  without  the  slight- 
est danger  of  any  question  being  raised  as  to  the  endorse- 
ment which  the  bank  cannot  face  with  impunity.  The  books 
will  show  that  he  got  credit  for  it,  and  that  he  received  the 
proceeds.  But  when  the  check  is  drawn  to  another  or  third 
party  there  is,  first,  the  danger  of  forging;  then  there  is 
diversion  of  funds,  which  means  that  the  check  was  intended 
for  one  purpose  and  used  for  another.  Then  if  the  payee  of 
the  check  is  a  corporation  or  trade  name,  there  comes  in  the 
question  of  power  to  endorse  on  the  part  of  the  party  who 
actually  wrote  the  endorsement. 

Again,  to  make  myself  clear,  I  will  say  that  power  to 
sign  and  endorse  for  a  corporation  can  only  be  given  by  the 
board  of  directors  of  that  corporation.  To  be  sure  that  an 
endorsement  of  a  corporation  is  correct,  it  is  necessary  to 
have  a  copy  of  the  resolutions  of  the  board  giving  power  to 
a  particular  officer,  we  will  say  treasurer,  and  a  copy  of  the 
minutes  of  the  meeting  of  the  board,  showing  the  individual 
elected  to  such  office.  These  copies  must  be  certified  to  un- 
der seal  by  one  of  the  officers,  usually  the  secretary.  Where 
a  check  is  drawn  to  the  order  of  a  trade  name  company,  a 
certificate  is  necessary,  certified  by  the  county  clerk,  as  a 
correct  copy  of  the  original  on  file  in  his  office,  showing  that 
certain  persons  are  doing  business  under  that  name.  When 
a  check  is  drawn  to  the  order  of  a  person  deceased  and  en- 
dorsed by  the  executor,  it  is  necessary  that  a  surrogate's 
certificate  should  be  had,  showing  who  was  named  or  ap- 
pointed as  executor  or  administrator  of  the  estate.  If  the 
check  is  drawn  to  the  order  of  a  person  arid  endorsed  by  an- 
other for  him  it  is  necessary  to  have  a  power  of  attorney.  If 
it  is  drawn  to  a  corporation  and  endorsed  by  the  treasurer 
and  placed  in  his  own  account  there  may  be  diversion  of 
funds  in  which  the  bank  may  be  involved.  I  am  citing  all 


THE    RECEIVING    TELLER  75 

of  the  above  as  necessary  in  third  party  endorsements,  if 
there  should  be  a  dispute  over  the  endorsement  in  the  future. 
Of  course,  in  the  case  of  a  reliable  depositor  who  is  solvent 
when  the  check  is  returned,  the  bank  simply  demands  the 
funds  from  him  or  charges  his  account. 

But  some  depositors  are  here  to-day  and  there  to-mor- 
row. If  the  depositor  cannot  be  found  or  is  insolvent  the 
bank  cannot  charge  his  account.  Then  if  a  dispute  arises  the 
bank  must  have  the  papers  mentioned  above,  to  support  its 
contention  that  the  endorsements  are  good.  This,  of  course, 
is  supposing  that  there  is  no  forgery  involved,  in  which  case 
no  papers  can  save  the  bank.8 

THE  RIGHT  NAME  SHOULD  BE  ON  THE  TICKET 

It  is  important  that  the  deposit  ticket  and  the  bank  book 
which  accompanies  it  shall  be  in  the  same  name;  for  if  the 
ticket  and  book  are  not  in  agreement,  the  ledger  account  and 
bank  book  will  not  tally.  This  is  especially  true  where  there 
is  more  than  one  depositor  of  the  same  name,  as  frequently 
obtains  in  the  city  banks.  It  is  not  unusual  to  find  banks 
with  two  or  three  accounts  bearing  the  same  name,  and  to 
distinguish  one  from  another  numbers  are  sometimes  given; 
and  these  should  always  appear  on  the  ticket,  so  that  the 
bookkeeper  will  not  post  to  the  wrong  account. 

Not  only  would  an  error  of  this  sort  lead  to  trouble  and 
confusion,  but  it  might  result  in  lawsuit  and  loss  to  the 
bank.  For  instance,  suppose  a  deposit  is  wrongly  credited, 
and  the  account  to  which  it  should  have  gone  becomes  over- 
drawn and  the  bank  refuses  payment  on  a  check  which 
would  be  good  had  the  credit  been  properly  made.  In  a 
case  of  unwarranted  protest,  the  bank  would  be  liable  in 
damages  if  protest  followed  where  the  account  was  good  for 
the  amount.  A  case  was  recently  tried  in  the  New  York 
courts  where  it  was  sought  to  hold  a  bank  liable  for  the 
amount  of  a  deposit  wrongly  credited  to  a  depositor  of  a 
similar  name,  the  one  to  whose  account  the  entry  was  wrong- 
ly made  seeking  to  hold  the  bank  for  the  amount,  on  the 
ground  that  it  had  made  similar  mistakes  before  and  this  was 
quite  likely  a  blunder  on  its  part  for  which  it  should  suffer. 
The  claimant  for  the  wrongly-credited  deposit  lost. 

»N.  D.  Ailing,  Assistant  Cashier,  Irving  National  Bank,  New  York,  before 
New  York  Chapter. 


76 

In  cases  of  wrongful  credit  it  is  sometimes  difficult  to 
make  a  correction,  especially  with  an  unscrupulous  depositor, 
who,  for  the  sake  of  the  amount  involved,  would  not  despise 
perjury.  If  the  teller  will  verify  the  name  on  the  slip  and 
that  on  the  book  such  errors  will  be  avoided.  Qf  course, 
should  the  error  be  due  to  the  depositor's  neglect,  another 
situation  would  arise;  and  it  is  entirely  possible  that  con- 
cerns having  several  bank  accounts,  or  several  concerns 
working  under  one  management,  might  get  the  pass-books 
mixed  and  present  the  wrong  ticket  with  a  book  and  thus 
be  responsible  for  the  error.  Therefore,  the  name  of  the  de- 
positor should  be  on  the  inside  of  the  book  as  well  as  out- 
side, and  the  teller  should  see  that  it  agrees  with  the  ticket. 

Deposits  are  often  made  without  the  book,  a  practice 
that  should  not  be  encouraged,  but  is  permitted  because 
there  seems  to  be  no  way  of  avoiding  it.  But  subsequent  en- 
tries should  not  be  made  until  the  book  has  been  to  the  book- 
keeper and  verified  with  the  ledger  and  if  possible  the  de- 
posit slip.  Bookkeepers  usually  make  such  entries. 

It  is  the  rule  in  many  banks  that  only  cash  or  its  equiva- 
lent may  be  immediately  credited  to  a  depositor's  account 
and  he  allowed  to  check  against  it,  especially  where  the  aver- 
age balance  is  not  large  and  the  depositor  is  working  on  a 
small  margin.  If,  however,  the  depositor  maintains  a  gen- 
erous balance,  of  course  all  items  can  go  into  the  credit.  But 
cash  and  exchanges  for  the  clearing-house,  which  include  all 
checks  on  banks  in  the  same  place  which  will  be  paid  within 
the  next  business  day,  may  be  entered  as  cash. 

PROVING  THE  TICKET 

It  is  usual  for  the  teller  to  check  the  items  as  he  proves 
them,  for  only  by  so  doing  can  he  ascertain  that  all  are  in 
hand.  It  is  often  the  case  that  silver  is  carried  in  the  de- 
positor's pocket,  and  if  not  asked  for  is  likely  at  times  to  be 
forgotten,  and  checking  is  the  only  way  by  which  to  over- 
come the  tendency  to  forget. 

It  is  a  very  good  rule  for  the  teller  to  have  a  stated 
method  of  verifying  the  deposit  slip.  He  should  first  take 
the  bills,  then  the  silver,  then  the  checks.  If  he  follows  this 
arrangement,  he  will  be  sure  to  get  the  money,  the  hardest 
thing  to  prove  he  did  not  get  if  any  dispute  should  arise. 


THE    RECEIVING    TELLER  77 

It  is  possible  that  a  crafty  clerk  would  devise  a  scheme 
to  trap  the  unwary  teller  by  withholding  part  of  the  deposit, 
and  if  not  noticed  pocket  the  funds.  It  is  an  easy  matter  to 
hold  back  a  ten-dollar  gold  piece  or  a  roll  of  silver,  but  if  the 
items  are  checked  in  the  order  they  appear  on  the  slip  such 
things  are  not  likely  to  happen.  And  if  a  clerk  were  to  suc- 
cessfully operate  such  a  trick,  he  might  easily  explain  that 
the  money  had  been  overlooked. 

One  of  the  duties  of  the  receiving  teller  is  to  collect  the 
exchange  charges,  or  deduct  the  same  from  the  deposit. 
Some  banks  keep  these  records  and  make  the  charge  at  the 
end  of  a  month,  or  half  yearly,  but  the  calculations  are 
usually  made  in  the  receiving  teller's  department.  The 
teller  should  be  familiar  with  these  charges. 

From  the  receiving  teller  the  checks  and  other  items  go  to 
the  proper  departments ;  cash  to  the  paying  teller ;  collections 
to  the  collection  department;  transit  items  to  the  transit  de- 
partment ;  foreign  items  to  the  foreign  department ;  coupons 
to  the  bond  and  coupon  or  collection  department.  The  credit 
instruments  may  merely  be  sorted  into  checks  on  the  deposi- 
tary bank :  checks  to  go  to  New  York  or  other  reserve  point, 
and  collections  to  go  to  the  clerk  who  has  the  mail  in  charge, 
and  who,  in  small  banks,  is  collection  clerk,  transit  man, 
clearing-house  settling  clerk,  and  several  other  positions 
combined  into  one. 


THE  MACHINERY  OF  BANKING 

If  we  were  to  trace  a  check  on  the  depositary  bank  from 
the  receiving  teller  back  to  the  depositor  we  would  get  a  very 
good  idea  of  the  working  machinery  of  a  bank  as  respects 
the  handling  of  a  check  drawn  on  itself.  If  we  were  to  fol- 
low the  route  of  a  local  check  through  the  clearing-house  we 
would  get  a  very  good  idea  of  the  clearing  of  checks.  If  we 
were  to  go  with  the  messenger  on  his  route,  we  would  get  a 
working  knowledge  of  how  a  check,  note  or  draft  is  collected 
by  presentation  over  the  counter  of  the  drawee  bank,  or  how 
an  item  such  as  a  draft  is  collected  from  the  drawee. 

If  we  were  to  trace  a  check  drawn  on  an  out-of-town 
bank  from  the  receiving  teller  to  the  transit  department, 
then  through  the  mails,  and  into  the  bank  upon  which  it  was 
drawn,  and  see  how  payment  is  made,  we  would  have  a 


78 


THE  PRACTICAL  WORK  OF  A  BANK 


working  knowledge  of  bank  collections;  and  if  we  were  to 
trace  the  money  we  would  have  an  idea  of  how  paper  money 
is  made,  issued  and  redeemed;  and  this  in  substance  is  what 
the  present  work  proposes  to  do.  And  by  reason  of  the  fact, 


DEPOSITS 

CASH 
RECAPITULATION 

CHECKS 

CURRENCY 

V«n!t 

1>  and  2j 

Counter 

Mutilated 

coin 

S1IVFR 

V.nlt 

MINOR  COIN 

Din,™ 

N;,-k,>i« 

ITEMS 

TOTAL  C.  i  I. 

CM!I  to  First  Teller 

Cash  Flush 

Cash  Short 

On  Hand  Yesterday 

PROOF 

TOTALS 

TELLER  No.. 

JATE  ..    . 


THE    NATIONAL   EXCHANGE    BANK 
OF  ROANOKE,  VA 

l*m  K-100-I-1-11 


TELLER'S  CASH  SHEET 


heretofore  stated,  that  the  deposits  of  banks  are  upwards  of 
ninety  per  cent,  in  checks,  these  are  the  most  important 
items  the  bank  handles. 

THE  TELLER'S  RECORDS  AND  His  PROOF 

The  receiving  teller,  as  a  rule,  needs  only  two  books — a 
cash  book  for  all  debit  entries  and  accounts  with  other  de- 


THE    RECEIVING    TELLER  79 

partments  of  the  bank  and  a  credit  book  for  all  deposits  and 
letters.  In  addition  he  must  have  sheets  for  his  city 
clearings  and  his  cash  items ;  also  proof  sheets  for  his  lots  or 
blocks  of  credits.  These  proof  sheets  are  ruled  and  are  of  a 
size  to  be  used  in  the  adding  machines.  After  the  teller  has 
taken  the  cash  and  coin  out  of  a  deposit  and  substituted  a 
ticket  in  its  place,  the  checks  and  credits  are  given  to  an 
assistant  to  sort,  following  the  headings  printed  at  the  top. 
The  one  marked  "Clearing-House"  means  the  city  checks; 
the  "New  York"  one  means  New  York  City  items;  the  "O. 
C.'s,"  other  checks  on  points  which  the  bank's  correspondents 
in  and  outside  of  New  York  City,  and  the  points  South  and 
West  cover;  "sundry,"  points  not  reached  by  the  regular 
correspondents;  "cash,"  the  tickets  substituted  for  bills  and 
coin;  "own  checks,"  checks  drawn  on  themselves;  "miscel- 
laneous," checks  or  drafts  on  brokers  and  checks  on  banks 
that  another  bank  may  be  clearing-house  agent  for;  and 
"credits,"  a  list  of  the  deposits  or  letters. 

The  three  latter,  after  the  items  have  been  listed  and 
proved  on  the  machine,  are  stamped  with  the  lot  number  for 
future  reference.  As  soon  as  a  proof  is  made  the  checks  are 
immediately  sent  forward,  except  the  checks  on  the  bank 
itself,  which  have  to  be  stamped  with  the  receiving  teller's 
stamp  and  sorted  out  by  ledgers,  and  then  listed  on  the  cash 
book  and  turned  over  to  the  bookkeeper  to  whom  they  be- 
long. The  clearing-house  checks  are  stamped  and  sorted  in 
racks;  the  New  York,  O.  C.  and  sundry  checks  are  given  to 
the  corresponding  clerks. 

It  is  obvious  that  if  the  receipts  are  listed  as  they  come 
in,  and  the  items  are  then  separated  into  different  depart- 
ments and  the  departments  charged  with  the  same,  the  total 
of  the  amounts  charged  to  departments  must  equal  the  total 
as  shown  by  the  first  listing.  This  is  the  "proof"  that  all 
items  received  have  been  charged  out  and  nothing  has  gone 
astray.  This,  of  course,  does  not  insure  that  a  check  which 
properly  belongs  in  the  clearing-house  checks  may  not  go  to 
the  transit  department;  but  as  soon  as  the  check  reaches  the 
transit  department  it  will  be  discovered  that  it  is  out  of  its 
place. 

In  a  small  bank  where  the  receiving  and  paying  is  done 
at  the  same  window,  and  by  the  same  man,  the  same  proof 
cannot  be  had,  for  he  handles  many  different  transactions 


80 


THE  PRACTICAL  WORK  OF  A  BANK 


and  he  must,  therefore,  work  with  a  teller's  proof  sheet, 
which  consists  of  the  cash  balance  at  the  beginning  of  the 
day,  the  receipts  and  the  payments,  the  result  being  the  cash 
on  hand  at  the  close  of  the  day.  He  enters  receipts  and 


For  Nation*!  Ron 


TELLER'S  CASH  BOOK. 


a  *  Sonv  N.  V  T.  C  A.  Stock  ) 


CASH  ITEMS  IN  DRAWER 

ITEMS 

AMOUNT 

Dun 

DRAFTS 

CHICKS      ' 

CHECKS 

Gold  in  Vault. 

Gold  in  Tray. 

Gold  Certificates. 

Silver  Certificates. 

Treasury  Certificates, 

Silver  $1  in  Vault, 

Fractional  Silver  in  Vault. 

Silver  $1  in  Tny, 

Silver  Me.  in  Tray, 

Silver  Me.  in  Tray, 

Silver  lOc.  in  Tray. 

TOTAL  COIN. 

Legal  Tender, 

TOTAL  RESERVE, 

National  Bank  Notes, 

Nickels  &  Pennies  in  Vault, 

Nickel:  in  Tray, 

Pennies  in  Tray, 

Mutilated  Currency, 

N.TCASM, 

Cash  Items. 

TOTAL  CASH, 
Cash  Over, 
Cash  Short. 

JOVKNAL  BAXJUfCl. 

TELLER'S  CASH  BOOK 

pajinents  as  made  and  any  error  made  during  the  day 
would  show  up  when  cash  is  balanced  at  night.  As  oppor- 
tunity affords  the  teller  lists  his  out-of-town  checks  and 
charges  the  same  to  the  clerk  or  department  that  makes  up 
I  he  mail  collections.  The  checks  on  his  own  bank  he  lists 
and  charges  to  the  bookkeeping  department.  He  also  lists 


THE    RECEIVING    TELLER  81 

the  deposit  tickets  and  charges  these  to  the  bookkeeping 
department.  These  lists  are  often  in  sheets  and  when  bound 
form  a  permanent  record  of  the  receiving  teller's  work.  As 
the  day  passes  accumulations  are  treated  as  just  shown,  so 
that  at  the  end  of  the  day  he  has  simply  his  proof  to  make  up. 
Usually  the  assistant  does  this  while  the  teller  receives  the 
deposits  at  the  window.  The  totals  of  the  checks  he  has 
charged  out  to  various  departments,  plus  the  cash  on  hand, 
must  equal  the  total  receipts  of  the  day  as  shown  by  his 
total  of  deposit  tickets.  When  proof  has  been  struck,  his 
cash  is  turned  over  to  the  paying  teller  and  the  day's  work 
is  done.  His  desk  is  clean  for  another  day,  and  to-morrow 
will  be  another  to-day. 

THE  "BLOCK"  SYSTEM 

The  most  expeditious  and  practical  method  of  balancing 
the  day's  work  in  a  bank  is  the  "batch"  or  "block"  system. 
Under  this  system  the  teller  verifies  the  currency  and 
checks  off  the  items,  but  does  not  prove  the  addition  of  the 
ticket  or  examine  the  checks  except  to  note  that  they  have 
been  endorsed  and  to  calculate  the  exchange  charges  to  be 
deducted  from  the  total. 

When  the  checks  and  deposit  tickets  have  accumulated 
sufficiently  to  permit  a  "run,"  they  are  taken  by  a  clerk  who 
sorts  the  checks  into  the  several  divisions  or  departments. 
Each  division  of  checks  is  then  listed  upon  an  adding  ma- 
chine, a  separate  total  taken  of  each  as  a  separate  list  and 
total  of  the  cash  deposited,  and  the  amount  of  the  exchange 
charges  deducted.  The  lists  of  the  two  latter  items  are  made 
up  from  the  amounts  as  shown  upon  the  deposit  tickets.  The 
aggregate  of  these  totals,  less  the  total  exchange  charges, 
should  equal  the  total  amount  of  the  deposit  tickets.  Should 
there  be  a  difference  the  work  must  be  checked  back  immedi- 
ately and  the  error  discovered,  which  may  consist  of  error 
in  listing  on  deposit  ticket,  or  error  in  addition  of  deposit 
tickets  or  error  in  listing  on  the  adding  machine. 

The  small  number  of  items  constituting  a  "run"  permits 
immediate  checking  in  case  of  error,  consuming  but  a 
minute  or  so  of  time.  When  found  correct,  the  total  of  each 


82 


THE  PRACTICAL  WORK  OF  A  BANK 


division  is  posted  separately  upon  the  "block"  sheet  under 
its  proper  heading  and  the  items  turned  over  to  their  re- 
spective departments.  This  operation  is  repeated  as  often 
as  the  volume  of  the  work  justifies,  until  the  business  of  the 
day  has  ceased. 

After  all  deposits  and  items  have  passed  out  of  hand, 


CR. 


CLEARING  TELLER'S  CASH   SHEET,   WHICH   DISTRIBUTES  THE   ITEMS 

the  balance  sheet  is  then  footed  and  a  grand  total  is  made 
of  each  heading,  which  aggregated  should  agree  with  the 
grand  total  of  the  deposit  tickets,  provided  every  "run"  or 
batch  has  been  balanced  and  properly  listed  on  the  balance 
sheet.  This  not  only  provides  an  absolute  figure  for  amount 
of  items  charged  to  the  various  departments,  but  also  pro- 
vides an  absolute  figure  for  the  amount  of  cash  (currency 
or  coin)  received  over  the  counter. 

The  cash  upon  actual  count  by  the  receiving  teller  him- 


THE    RECEIVING    TELLER  88 

self  should  correspond  with  the  total  amount  of  cash  as 
shown  by  the  balance  sheet.  Differences  in  this  respect  are 
only  due  to  the  teller's  careless  handling  or  inability  to  see 
that  the  proper  amount  of  cash  (currency  or  coin)  is  re- 
ceived when  the  deposit  is  made. 

In  the  larger  banks  which  handle  a  large  line  of  depos- 
its the  work  should  be  systematized  among  the  teller's  as- 
sistants, so  that  one,  or  if  the  work  justifies,  two,  will  con- 
fine their  attention  to  checking  the  items  on  the  deposit 
tickets  and  sort  the  items  for  a  "run."  The  other  assistant 
or  assistants  confine  their  attention  to  the  listing  and  prov- 
ing of  the  different  "runs,"  and  posting  them  upon  the  bal- 
ance sheet.  The  advantage  of  this  system  is  evident  in  that 
it  detects  immediately  any  error  in  the  deposit  ticket,  pro- 
vides a  proof  of  the  actual  cash  (currency  or  coin)  received, 
and  balances  the  work  as  it  progresses. 

The  receiving  teller's  work  is  practically  balanced  as  soon 
as  the  last  "batch"  is  run  off  and  no  longer  is  he  compelled 
to  go  over  the  footings  of  the  deposit  tickets  or  to  check  back 
each  separate  item,  as  is  necessary  in  case  of  a  difference 
under  the  obsolete  system  formerly  in  general  use.* 

A  DAY  IN  THE  TELLER'S  CAGE 

The  foregoing  is  a  composite  picture  of  the  work  of  the 
receiving  teller,  gathered  from  many  sources.  The  work  of 
the  receiving  teller  for  a  day  has  been  fully  and  admirably 
covered  by  Mr.  Horace  F.  Fuller,  receiving  teller  of  the 
Second  National  Bank  of  Boston,  in  a  paper  read  before 
Boston  Chapter,  A.  I.  B.  He  says: 

"Beginning  the  day's  work  in  an  active  city  bank  where 
the  receiving  department  handles  all  the  incoming  cash 
items,  the  first  duty  is  the  morning  mail.  As  soon  as  re- 
ceived, the  letters  are  separated  into  the  city  or  clearing- 
house letters  and  the  foreign.  The  clearing-house  letters  are 
immediately  checked  off  or  proved  on  the  adding  machines; 
the  clearing-house  checks  separated  from  the  rest  and 
stamped,  sorted  in  racks  and  listed  on  the  clearing-house 
sheets,  and  the  slips  proved.  This  is  very  important,  as  it 
must  be  done  and  down  at  the  clearing-house  at  ten  o'clock, 

<C.  W.  Fowler,  of  the  Trust  and  Deposit  Co.  of  Onondaga,  Syracuse,  N.  Y., 
before  Syracuse  Chapter,  A.  I.  B. 


84        THE  PRACTICAL  WORK  OF  A  BANK 

so  a  bank  may  have  the  use  of  the  funds  on  that  day.  When 
the  work  is  unusually  heavy,  it  can  be  seen  that  speed  and 
accuracy  are  required  to  get  everything  cleared  up  at  that 
time. 

"The  rest  of  the  checks  are  sorted  to  the  various  places 
and  listed.  The  credits  are  entered  in  the  credit  book.  Then 
the  receiving  teller  is  ready  for  his  morning  settlement.  He 
first  enters  in  red  ink,  to  distinguish  them  from  the  after- 
noon cash,  the  items  under  the  various  heads.  Then  he 
takes  a  total  of  these  items  from  his  cash  book  and  subtracts 
the  total  from  the  total  credits,  and  if  that  agrees  with  the 
amount  obtained  by  subtracting  the  afternoon  clearing  from 
the  total  morning  clearing  his  settlement  is  right  and  he  can 
go  on  with  the  day's  work,  satisfied  that  the  morning  letters 
are  right. 

"If  wrong,  the  letters  are  first  added,  bills  recounted 
and  all  comparisons  gone  over.  If  not  discovered  the  error 
has  to  stand  until  afternoon  and  then  the  letters  are  re- 
checked.  In  the  meantime  some  clearing-house  bank  may 
call  up  and  hive  found  the  difference  in  checking  off  their 
clearing.  This  is  adjusted  by  a  charge  or  credit. 

"The  foreign  letters  are  sorted  and  proved  by  the  block 
of  a  dozen  letters  or  so,  according  to  the  number  of  checks 
they  contain.  The  checks  are  then  turned  over  to  assistants 
to  be  sorted  in  their  various  places.  The  New  England 
checks  are  generally  the  largest  amount,  as  there  are  640  or 
more  banks  represented,  and  these  all  have  to  be  sorted  in 
racks  and  made  up  on  sheets  and  slips  printed  for  that  pur- 
pose. The  New  York  and  other  checks,  or  checks  which  are 
sent  to  the  bank's  correspondents  in  the  various  cities,  and 
the  sundry  checks,  which  are  on  points  not  reached  by  the 
bank's  correspondents,  and  have  to  be  sent  direct,  are  deliv- 
ered to  the  corresponding  clerks.  Checks  on  his  own  bank 
are  sorted  alphabetically  and  charged  up  to  the  ledgers  cor- 
responding to  that  letter.  The  brokers'  drafts  and  coupons 
not  payable  through  the  clearing-house  are  passed  to  the 
collection  clerk,  who  sends  them  out  with  his  drafts  for  col- 
lection. Then  if  the  bank  is  clearing-house  agent  for  any 
city  bank  their  checks  are  sorted  separately  and  charged  on 
the  ledgers  to  which  they  belong,  and  delivered  to  a  mes- 
senger from  that  bank  as  shortly  after  ten  o'clock  as  pos- 
sible. 


THE    RECEIVING    TELLER  85 

"For  the  items  returned  by  correspondents  for  any  irreg- 
ularity, a  charge  is  written  on  a  manifold  book,  one  part 
going  to  the  bank's  customer  with  the  item  and  the  other 
part  to  the  bookkeeper.  This  latter  is  charged  the  same  as 
a  check  on  the  ledger  to  which  it  belongs. 

"Shortly  after  ten  o'clock  a  list  is  generally  received 
from  the  paying  teller  containing  what  is  generally  known 
as  the  clearing-house  outs.  These  consist  of  checks  returned 
from  the  New  England  Clearing-House  protested  or  for 
some  irregularity,  and  possibly  New  York  checks  which  have 
een  received  by  the  clearing-house  in  payment  of  its  letters. 
Ijhese  latter,  of  course,  are  generally  charged  by  request,  as 
a/  bank  may  want  the  New  York  funds  for  remittances  or 
transfers.  The  returned  items  are  charged  as  stated  above. 

"Often  customers  have  a  preference  as  to  the  way  they 
want  their  account  kept  at  the  bank,  and  object  to  charges. 
In  that  case  the  receiving  teller  must  call  the  depositor  on 
the  'phone  and  request  his  check  or  cash  in  exchange  for  the 
returned  item.  Sometimes  a  request  for  a  second  presen- 
tation is  made  if  returned  for  lack  of  funds. 

"It  is  always  well  to  keep  all  returned  items  disposed  of 
as  promptly  as  possible. 

"Throughout  the  day,  as  the  deposits  accumulate,  they 
are  turned  over  to  assistants  to  be  proved  in  lots,  stamping 
each  ticket  with  lot  letter  to  correspond.  The  checks  are  dis- 
tributed as  in  the  morning  and  credits  entered  on  book.  If 
during  the  day  large  amounts  of  bills  are  deposited  by  banks 
or  corporations,  these  are  generally  charged  to  the  paying 
teller. 

"Shortly  after  one  o'clock  in  the  afternoon  the  second 
lot  of  returned  items  are  charged  over  by  the  paying  teller, 
these  having  been  returned  by  the  city  clearing-house  banks. 
The  process  of  their  disposal  is  repeated  as  with  the  morn- 
ing ones. 

"At  three  o'clock  the  New  England  Clearing,  which  has 
in  the  meantime  been  listed  on  sheets  and  the  slips  provided 
for  same,  is  totalled  and  comparison  made  with  total  of  the 
receiving  teller's  cash  book.  It  is  then  sent  down  to  the 
clearing-house  and  a  receipt  taken,  which  is  charged  in  on 
the  following  afternoon's  city  clearing. 

"The  closing  time  having  arrived,  all  deposits  arriving 
late — except  the  larger  ones  which  with  the  small  ones  must 


80        THE  PRACTICAL  WORK  OF  A  BANK 

be  carefully  examined  for  foreign  items — are  held  out  until 
the  following  day.  By  this  time  there  is  generally  quite  an 
accumulation  of  deposits  on  hand,  and  as  much  speed  as  pos- 
sible must  be  used  by  the  teller  and  his  assistants  so  that  the 
other  departments  of  the  bank  may  not  be  held  up. 

"Having  made  the  necessary  distributions  of  checks  and 
credits,  totals  are  made  on  all  the  books,  the  bills  counted, 
sorted  and  strapped,  the  coin  rolled  in  wrappers  when  the 
amounts  are  large  enough,  and  the  cash  items  listed  on  a 
sheet.  The  latter  generally  consist  of  brokers'  drafts  of 
small  amounts,  coupons,  and  checks  of  banks  for  which  the 
teller's  bank  is  clearing  agent,  and  generally  some  return 
items  awaiting  instructions  or  checks  from  customers,  to- 
gether with  small  New  England  Clearing-House  checks  re- 
ceived too  late  for  clearing.  Comparison  is  then  made  with 
the  departments  which  have  been  charging  or  crediting  items 
during  the  day — in  this  case  the  paying  teller's  and  collec- 
tion clerk's  and  discount  clerk's. 

"The  receiving  teller  then  makes  up  his  balance,  which 
consists  of  the  Boston  Clearing,  cash  items,  bills  and  coin, 
and  proceeds  to  a  settlement.  The  collection  clerk  has  no 
debit  side.  This  is  generally  the  case,  as  his  receipts  of  notes 
and  collections  are  charged  over  and  are  very  much  larger 
than  the  receiving  teller's  debit  to  him.  His  bills  and  coin 
are  added  to  the  receiving  teller's  cash  items,  and  so  appear 
in  the  general  bank  balance. 

"The  credit  balance  is,  of  course,  the  balance  of  the  day 
before.  The  two  sides  are  alike  when  a  correct  settlement 
is  made. 

"Generally  some  small  difference  will  creep  in  and  neces- 
sitates a  careful  going  over  of  the  cash.  The  bookkeepers 
make  comparisons  with  the  debits  and  credits  as  charged  to 
them  and  the  error  may  turn  up  there.  The  beauty  of  the 
block  system  as  opposed  to  the  old  method  of  checking  off 
is  here  apparent  because  if  there  is  an  error,  as  a  general 
thing  it  is  not  in  the  deposit  or  credit  tickets,  these  all  hav- 
ing been  proved. 

"If  there  is  a  small  difference  of  less  than  a  dollar  and 
it  cannot  be  found,  it  is  added  or  subtracted  from  the  cash 
items,  and  the  following  day  a  debit  or  credit  is  made  to 
'over'  or  'short'  account  on  the  bank's  ledger.  Often  there 
will  be  a  difference  in  the  city  clearing  due  to  some  assistant 


THE    RECEIVING    TELLER  87 

not  making  over  a  blind  check.  This  latter  work  must  al- 
ways be  insisted  upon  as  a  safeguard  against  incorrect  work, 
as  it  later  saves  the  time  it  might  otherwise  require  to  look 
through  a  large  city  clearing,  though  bright  assistants  will 
remember  some  circumstance  in  connection  with  certain 
checks,  and  the  difference  may  be  straightened  out  imme- 
diately. 

"After  the  receiving  teller  has  balanced  his  cash  and  the 
book  work  is  all  finished,  a  copy  of  his  balance  is  made  out 
on  a  ticket  and  turned  over  to  the  paying  teller  to  become  a 
part  of  the  bank's  balance.  In  the  larger  banks  the  receiv- 
ing teller's  department  is  divided  into  another  department 
called  the  check  teller's  department.  In  this  case  the  credits 
and  checks,  after  the  cash  has  been  taken  out  and  a  ticket 
substituted  therefor,  are  turned  over  to  the  check  teller  and 
a  proof  of  the  bills  and  coin  is  made  at  the  end  of  the  day 
by  totaling  these  tickets,  a  duplicate  of  which  is  kept  on  the 
autograph  register." 

NOTE:  The  clearing  of  checks  on  New  England  banks,  which  were  formerly 
collected  through  the  Boston  Clearing  House,  is  now  done  through  the  Boston 
Federal  Reserve  Bank.  (December,  1920.) 


CHAPTER  VI. 

THE  PAYING  TELLER,  HIS  PAYMENTS  AND 

HIS  CASH 

I  have  indicated  that  the  logical  development  of  this 
work  is  to  trace  the  items  that  enter  the  receiving  teller's 
cage  to  their  final  conclusion;  and  inasmuch  as  we  observed 
that  all  the  cash  was  turned  over  to  the  paying  teller,  it  fol- 
lows that  this  part  of  the  banking  operations  comes  next ;  for 
having  brought  both  money  funds  and  credit  funds  into  the 
bank,  we  must  get  them  out  again,  otherwise  the  machinery 
would  become  clogged. 

If  we  were  to  follow  the  strictly  logical  order  taken  by  the 
funds  received  by  the  receiving  teller,  we  might  next  consider 
how  the  money  he  receives  is  loaned ;  but  since  the  great  ma- 
jority  of  loans  are  in  the  form  of  credits  on  the  books,  the 
consideration  of  the  paying-out  process  is  next  in  order; 
for  all  funds  deposited  are,  or  are  intended  to  be,  drawn 
out — not  through  the  paying  teller's  window,  but  by  a  proc- 
ess that  goes  through  the  paying  teller's  department,  name- 
ly, the  bank  clearing  settlements,  for  all  checks  drawn  on 
the  bank  ultimately  go  through  the  paying  teller. 

The  receiving  teller's  department  is  the  front  door — the 
great  hopper  into  which  are  poured  the  deposits  of  the  bank, 
and  which  furnish  the  raw  material  out  of  which  it  manu- 
factures credit — the  finished  product  of  banking.  The  pay- 
ing teller's  department  is  the  principal  exit  for  the  cash. 
The  paying  teller  is  custodian  and  dispenser  of  the  bank's 
cash.  It  is  piled  high  on  his  counter.  He  must  have  it  in 
abundance.  The  receiving  teller  gets  rid  of  it  as  quickly  as 
possible.  It  is  of  no  use  to  him  once  the  count  is  verified. 

We  can  all  remember  the  awe  with  which  we  gazed  at 
the  piles  of  bills  in  the  bank,  and  wondered  where  it  all 
came  from,  and  what  we  would  do  if  we  only  had  part  of  it. 
;  Money  in  bulk  always  impresses  the  average  man,  as  does 
anything  of  great  value.  Witness  the  crowds  that  surround 
the  wagons  at  the  Sub-Treasury  in  New  York  when  they 
are  unloading  kegs  of  gold;  as  if  to  handle  a  keg  of  gold 
were  more  of  a  feat  than  to  handle  a  keg  of  nails! 

88 


THE    PAYING    TELLER  89 

But  to  the  bank  teller,  money  comes  to  have  a  different 
meaning.  It  is  his  stock  in  trade:  precious  it  may  be,  but 
he  handles  it  with  alacrity  as  the  grocer  handles  sugar. 

RECEIVING  TELI.ER  vs.  PAYING  TELLER 

The  receiving  teller  does  business  only  with  the  bank's 
customers;  the  paying  teller  does  business  with  the  public. 
The  receiving  teller  has  the  advantage  that  he  can  check  his 
work;  that  is,  he  can  put  it  aside,  even  after  once  verifying 
it  and  make  another  proof  if  he  is  in  doubt;  but  the  paying 
teller  after  paying  money  out  cannot  detect  the  error  until 
closing  time  comes,  and  then  he  may  simply  know  an  error 
has  been  made  somewhere.  If  the  over-payment  has  been 
made  to  an  honest  customer,  who  detects  it,  it  will  be  re- 
turned. 

QUALIFICATIONS    AND    ESSENTIALS    OF    A    GOOD    PAYING 

TELLER 

The  first  essential  of  a  good  paying  teller  is  that  he  shall 
keep  a  cool  head  and  be  courteous.  He  will  work  under 
pressure  at  times,  and  must  be  calm  in  the  paying  out  of 
money.  It  must  be  remembered  that  the  receiving  teller  can 
only  be  defrauded  (a)  by  receipting  for  that  which  he  does 
not  get,  and  this  is  not  likely  to  happen  often;  and  (b)  by 
receiving  bad  money,  and  this  is  riot  frequent.  But  the  pay- 
ing teller  has  many  avenues  for  mistakes.  He  may  pay  a 
forged  check;  he  may  over  pay.  He  may  pay  the  wrong 
party;  he  may  pay  a  post-dated  check,  or  a  stale  check,  or  a 
raised  check.  He  may  over  certify ;  allow  an  overdraft ;  and 
in  many  ways  is  taking  risks  all  the  time.  But  the  first  es- 
sential is  that  he  shall  know  how  to  count  money  easily, 
gracefully  and  correctly,  and  without  becoming  weary. 

The  teller  should  cultivate  a  memory  for  faces  and 
names,  and  know  the  preferences  of  his  depositors;  for  it  is 
an  act  of  graciousness  to  hand  one  who  prefers  new  money 
that  and  nothing  else.  He  should  know  counterfeits  as  well 
as  the  receiving  teller,  from  whose  cage  he  is  quite  likely  to 
have  graduated.  And  the  same  qualities  should  obtain  in 
both.  It  is  hardly  necessary  to  say  that  he  should  be  neat, 
dignified,  yet  friendly,  of  clean  personal  habits,  for  these 
qualities  should  be  found  in  all  bank  men. 


90 


THE  PRACTICAL  WORK  OF  A  BANK 


IRVING  NATIONAL  BANK 

NEW  YORK. 

DEPOSITOR 

Name 

PAV    ROLL 

Ones  in  packages  of  $25  &  $50 

DOLLARS 

CENTS 

Fives  "         "           "  100  &  250 

,      Tens  "         "           "  100  &  500 

i 

Twenties      "           "  500  &  1000 

Large 

Pennies        25  &  SOc  Rolls 

Nickels         $1  &  $2       " 

Dimes                      5       " 

Quarters       5  &  10      " 

Halves           5  &  10      " 

TOTAL 

10m    43    4-14 

REQUISITION    FOE    PAY    BOLL    MONEY 


THE    PAYING    TELLER  91 

The  qualifications  of  the  paying  teller  are  well  summed 
up  by  a  Boston  teller  when  he  says:  "The  paying  teller 
should  have  the  patience  of  Job,  the  wisdom  of  Solomon,  the 
manners  of  a  Chesterfield,  the  speed  of  an  adding  machine, 
and  I  might  add  the  constitution  of  a  Roosevelt." 

THE  PAYING  TELLER'S  DUTIES 

The  main  duties  of  the  paying  teller  are  as  follows: 
(a)  To  pay  checks  drawn  on  his  bank  and  presented  over 
the  counter.  These  are  presented  by  depositors  for  pocket 
cash,  but  most  generally  for  payroll  and  other  purposes 
where  money  payments  are  necessary,  (b)  To  certify  checks. 
ft  is  quite  the  general  custom  for  the  paying  teller  to  cer- 
tify checks,  although  in  large  banks  there  may  be  a  special 
window  for  this  work,  and  a  special  certification  clerk,  but 
the  duties  are  incidental  to  the  paying  teller's  work,  since 
the  certification  of  a  check  is,  broadly  speaking,  equivalent 
to  paying  it.  If  the  bank  is  not  a  member  of  the  clearing- 
house, the  paying  teller  will,  of  course,  make  the  settlements 
with  other  banks. 

In  addition  to  the  above  he  also  (c)  has  charge  of  the 
signature  cards  of  the  bank's  depositors;  (d)  keeps  a  record 
of  the  stop  payments;  (e)  makes  shipments  of  currency  to 
the  bank's  correspondents;  makes  up  payrolls,  etc.  He 
makes  deposits  to  the  redemption  fund  in  Washington,  and 
through  his  department  passes  the  transactions  with  the 
Treasury  Department  in  regard  to  the  issue  and  redemption 
of  money.  In  some  banks1  he  also  settles  the  clearing-house 
balances,  and  in  some  institutions  examines  the  signatures 
and  endorsements  on  clearing-house  exchanges. 

The  paying  teller  in  the  course  of  the  day  receives  items 
on  other  banks  for  cashing,  just  as  the  receiving  teller  re- 
ceives checks  on  other  banks  for  deposit  and  collection.  There 
is  no  obligation  on  the  part  of  a  bank  to  cash  a  check  on  an- 
other bank,  but  it  is  done  as  a  matter  of  courtesy. 

Checks  when  paid  are  usually  stamped  or  placed  on  a 
special  spindle  that  perforates  in  a  certain  mariner,  indi- 
cating that  cash  was  paid  on  the  check.  Even  though  checks 
are  "spindle  cut"  to  show  that  payment  has  been  made  in 
cash,  they  should  be  stamped  on  the  back  to  show  the  date 
of  payment. 


92 


THE  PRACTICAL  WORK  OF  A  BANK 


1-2 

5 

10 

20 

50 
100 

500 
1000 

TOTAL 

Silver  Certificates               Old 
New 

!>ir       Legal  Tender  Certificates  Old 
Res.  \     .                             ••         Ncw 

/Gold        "              "          Old 
1     New 

/Silver  Certificates              Old 
"              "                    New 

VAULT 

"    \ 
Off      1  Legal  Tender  Certificates  Old 

Res.         "          "               "        New 

Gold        "               "         Old 
New 

Silver  Certificates              Old 
"                    New 

Off     Legal  Tender  Certificates  Old 
and 
"                 "        New 

Kes      Gold         "                "         Old 
"                "        New 

C.  H.  Certificates  Gold 

Gold  Certificates-               Old 
New 

VAULT 

Legal  Tender  Certificates  Old 
New 

Silver  Certificates               Old 
New 

Gold  Coin 
Silver  Coin 

C.  H.-  Certificates  Gold 
"        Notes 
Treas.    .                 to  order 
Gold  Certificates 
Silver  Certificates 
Silver  in  Trays 
Nickels  and  Pennies 
Federal  Reserve  C'y 
Irving  National  C'y 
Other          "          " 
Ass't.  Treas.  Receipts 

BOX 

• 

TOTAL  CASH 

LIST  OF  CASH  ON  HAND.  THIS  BANK  KEEPS  THREE  RESERVES :  ONE  IN  CHARGE  OF  AN 
OFFICER  AND  MEMBER  OF  COMMITTEE  OF  DIRECTORS ;  ANOTHER  IN  CHARGE  OF  TWO 
OFFICERS;  THE  THIRD  IN  CHARGE  OF  OFFICER  AND  TELLER.  THE  FIRST  TWO  ARK 
DISTURBED  ONLY  AT  TIME  OF  AUDIT;  THE  LAST  IS  IN  DAILY  USE. 


THE    PAYING   TELLER  93 

THE  PAYING  TELLER'S  CASH 

The  paying  teller  originally  was  custodian  of  all  the 
bank's  cash,  all  other  departments  handling  money  turning 
the  same  over  to  him:  but  as  banks  grew  in  size  and  their 
cash  holdings  became  larger,  in  many  banks  the  cash  has 
been  placed  in  charge  of  one  or  more  officers,  who  control  all 
or  part,  the  teller  accounting  to  them  and  they  supplying 
him  as  his  needs  require. 

The  reserve  cash  is  usually  placed  by  itself  in  large 
bundles,  added  to  or  taken  from  as  the  counter  needs  and 
the  needs  of  correspondents  require.  At  times  the  teller 
has  access  to  all  cash  in  conjunction  with  an  officer,  or  it 
may  be  he  will  have  access  only  to  his  counter  cash.  Cus- 
toms vary. 

The  paying  teller  should  plan  to  have  in  his  cage  at  the 
opening  of  business  an  ample  supply  of  both  bills  and  coin 
to  meet  any  demand  made  at  the  counter.  Of  course,  in 
making  shipments  to  correspondents  the  supply  in  the  vault 
may  be  drawn  upon,  but  there  should  be  such  a  stock  in  the 
cage  that  no  customer  will  be  obliged  to  wait  for  a  trip  to  be 
made  to  the  vault.  The  teller  can  soon  gauge  his  require- 
ments, and  will  arrange  his  bills  and  coin  in  suitable  quanti- 
ties to  be  handled  rapidly  without  counting. 

Flat  coin  trays  for  rolled  coin  not  only  facilitate  paying 
but  aid  in  counting  at  the  time  of  settlement. 

There  are  various  coin  racks  for  the  counter,  holding  just 
such  quantities  of  silver  coin  as  are  most  frequently  called 
for  during  the  day,  and  the  automatic  cashiers  for  paying 
odd  change  are  great  time  savers. 

Within  the  last  few  years  a  machine  has  been  introduced 
into  the  banking  business  which,  next  to  the  adding  machine, 
is  the  greatest  time  saver  ever  given  to  the  teller's  depart- 
ment. This  is  the  automatic  coin-rolling  machine,  which, 
under  electric  power,  counts,  rolls  and  wraps  tightly  nnd 
very  speedily  and  accurately  all  classes  of  fractional  and 
minor  coin.  The  edges  of  the  wrappers  are  tightly  crimped 
like  those  of  a  paper  cartridge,  leaving  exposed  a  coin  on 
each  end  of  the  roll.  The  wrapper  cannot  be  opened  with- 
out tearing,  and  by  rolling  with  the  machine  all  coin  depos- 
ited, one  can  avoid  the  predicament  of  a  bank  which  found 
in  its  cash  some  neatly  measured  lengths  of  gas  pipe  masque- 
rading as  rolled  coin. 


THE    PRACTICAL   WORK  OF   A   BANK 


THE    PAYING    TELLER  95 

The  teller's  cash  is  sorted  into  the  various  classes  for 
making  up  the  reserve,  for  all  cash  cannot  be  held  in  the 
reserve;  therefore,  the  cash  is  classified  and  a  record  kept  of 
the  gold  and  silver,  gold  and  silver  certificates,  legal  tenders 
(greenbacks),  national  bank  notes,  clearing-house  certifi- 
cates, Federal  Reserve  notes  and  the  subsidiary  coin.  The 
various  amounts  are  listed  on  the  tally  slip  which  forms  part 
of  his  daily  proof.  Systematic  arrangement  of  his  money  is 
essential  if  he  is  to  work  quickly,  as  well  as  efficiently — 
knowing  just  where  to  find  what  he  wants,  in  the  form 
wanted.1 

Of  course,  all  cash  is  put  in  the  vaults  at  night,  but  many 
a  teller  has  gone  back  after  supper  to  be  sure  he  left  no  cash 
out,  and  one  Boston  janitor  is  on  record  as  having  taken  a 
long  trip  on  the  money  a  forgetful  (they  are  never  careless) 
teller  left  in  the  drawer. 

An  amusing  story  is  told  of  a  teller  who  purposely  left 
all  his  counterfeit  accumulations  in  the  drawer — and  in  the 
days  of  the  "wild  cat  banks"  it  was  plentiful.  One  day  he 
was  off  his  post  and  a  director  took  his  place.  Coming  back 
the  next  day  he  was  rebuked  for  his  carelessness  for  leaving 
money  in  the  till  over  night.  "What  did  you  do  with  the 
money  you  found  in  the  drawer?"  was  the  teller's  first  query. 
"Paid  it  out,  of  course,"  replied  the  director-teller. 

Many  banks  place  the  cash  under  two  combinations,  re- 
quiring two  men  to  operate.  This  is  along  the  line  of  the 
policy  of  safeguarding  the  bank  against  the  possibility  of  a 
large  loss  through  carelessness  or  dishonesty  or  even  by  ac- 
cident, such  as  occurred  in  one  of  our  banks  some  thirty 
years  or  so  ago. 

The  paying  teller  of  this  bank  found  his  cash  $10,000 
short  one  day,  and  though  he  searched  high  and  low  he 
found  no  trace  of  the  money  nor  any  clue  to  its  whereabouts. 
He  lost  his  position  and  was  for  a  number  of  years  an  object 
of  espionage  and  suspicion,  and,  of  course,  suffered  severely 
both  mentally  and  financially.  A  number  of  years  later,  in 
making  some  changes  in  the  bank's  vault,  $10,000  in  large 
bills  was  found  that  had  slipped  behind  or  fallen  beneath  a 
partition  of  the  safe  in  such  a  manner  that  only  the  recon- 
struction of  the  safe  revealed  its  hiding-place. 

p.  136  for  latest  ruling  on  this  subject. 


a  o 


o  fe 


v  *  2 

s  Q  g  a 

§  tf  W    O 

^  »  a     X 

<  8  o§ 

a  ^  *  ri 


4  H  o 

H 

5  5  ° 

O    ^*    r^  ' 

6x3 

H    O 

x  a  M 
Sgg 

i  ?! 


EH     fe     5 


8* 
« 

B    O 
W    ^ 


O 

H    g    O 

—    P     >> 


o  ft  o 
a  ^  S  2? 


sle^ 


ft 

"  8 


THE    PAYING    TELLER  97 

One  of  the  developments  of  modern  banking  is  the  tre- 
mendous demand  for  new  bills  which  imposes  an  additional 
burden  upon  the  paying  teller — that  of  keeping  an  ample 
supply  of  all  denominations  of  new  bills  and  coin  not  only 
for  his  counter  use,  but  to  meet  the  requests  of  correspondent 
banks.  This  has  had  a  beneficial  effect  upon  the  quality  of 
the  ordinary  counter-money  put  in  circulation,  because  the 
banks  are  obliged  to  sort  their  soiled  and  mutilated  bills 
very  carefully,  which  results  in  a  high  average  of  clean  bills 
in  daily  use. 

Unfit  bills  are  sent  to  the  Treasurer  of  the  United  States 
in  Washington  or  to  any  Sub-Treasury  for  redemption,  and 
return  as  new  bills,  and  form  what  is  practically  the  only 
source  of  supply  of  new  currency.  These  "unfit"  bills,  as 
they  are  called,  must  be  sorted  into  the  various  kinds — gold 
or  silver  certificates,  legal  tender  or  Treasury  notes  and 
national  bank  notes. 

In  making  up  packages  of  bills  for  redemption,  not  more 
than  100  bills,  and  of  one  denomination  only,  may  be  con- 
tained in  a  strap  or  band.  Each  strap  must  state  the  kind, 
denomination  and  number  of  bills  enclosed,  and  must  have 
the  sender's  name  upon  the  strap. 

Only  one  kind  of  bills  in  multiples  of  $50  may  be 
sent  in  a  package,  and  not  over  4,000  bills  may  be  enclosed 
in  one  package. 

The  express  rate,  including  that  for  the  new  bills  re- 
turned, is  forty  cents  per  $1,000,  except  for  national  bank 
notes  for  which  the  rate  is  twenty  cents  per  $1,000. 

All  bills  received  from  the  Treasury  Department  are  in 
packages  of  100,  the  last  number  of  the  bill  number  run- 
ning consecutively.  Many  banks  have  rules  of  their  own  as 
to  the  strapping  of  money,  due  to  the  trade  they  handle, 
and  endeavor  to  accommodate  themselves  to  it.  Silver  comes 
from  the  Treasury  in  bags  of  $1,000  for  halves,  quarters  and 
dimes;  nickels  in  bags  of  $200,  consisting  of  four  $50  bags; 
cents  in  bags  of  $10.  The  wrapping  of  coin  has  already 
been  mentioned  in  this  chapter. 

Upon  the  paying  teller  devolves  the  duty  of  filling  the 
orders  of  correspondent  banks  for  bills  and  coin.  In  the 
case  of  a  bank  with  a  large  number  of  correspondents  this  is 
a  daily  occurrence,  and  the  ingenuity  of  the  paying  teller  is 
often  taxed  to  comply  with  these  requests  and  still  maintain 


\J 
X 


lll!l 

O  H  ^  ^  . 
M  S  k  BP 
B  ~  P  H  Q 


0    °    H    S 
.    >    S    K 

•<      KB 


§s 


S  w    ^  K 


m    Q  ^  tfi 

<  8  SH& 

&  X  a 

5  S  5  S  S 


to     -  <z 

se-  q  S 


a  3  i  a  s 

USES  s 


3   H   PI   •«    x 

-HSM 


w  « 

B  g  0  w 


asl3l 


. 


98 


THE    PAYING   TELLER  99 

an  adequate  supply  for  his  counter  use.  It  is  his  duty,  also, 
to  forward  to  depositors  currency  for  their  payrolls  by  ex- 
press or  by  messenger  as  the  occasion  may  require. 

In  shipping  currency  an  advice  of  the  shipment  should 
always  be  sent  by  mail.  The  messengers  should  be  required 
to  show  the  express  receipts  for  shipments,  and  the  acknowl- 
edgment of  the  receipt  of  the  cash  is  shown  before  being 
filed,  all  this  being  in  the  nature  of  a  check  on  the  trans- 
action. 

Of  late  years  the  sharp  competition  for  business  has 
brought  about  a  new  situation  for  banks  to  meet.  Some 
banks  solicit  from  their  depositors  and  others  have  thrust 
upon  them  payrolls  to  be  made  up  individually  by  the  bank. 
In  many  cases  the  number  of  employees  on  the  payroll  will 
run  into  the  hundreds  and  even  into  thousands,  and  this 
work  naturally  belongs  to  the  paying  teller's  department. 

THE  CLEARINGS 

As  soon  as  the  bank  opens  the  window  work  begins;  but 
in  some  banks  the  window  work  is  not  the  greatest  part  of 
the  teller's  duties,  the  inside  work  being  of  greater  volume. 
As  soon  as  the  clearings  arrive  and  have  been  posted  to  the 
ledgers  they  are  generally  turned  over  to  the  paying  teller 
for  verification  of  signatures.  And  inasmuch  as  most  clear- 
ing-houses have  rules  regulating  the  time  when  checks  that 
are  not  to  be  paid  must  be  returned,  it  is  essential  that  the 
teller  have  ample  time  in  which  to  make  his  verifications. 
And  the  sooner  he  gets  the  clearings  the  better  for  all.  He 
must  know  the  depositors  of  the  bank  as  to  their  handwrit- 
ing particularly,  the  bookkeeping  department  having  passed 
upon  the  bank  balance.  He  must  know  what  signatures  are 
required  on  corporation  checks  and  how  many ;  and  who  may 
draw  by  power  of  attorney.  He  must  mind  his  stop  pay- 
ments. The  method  of  making  clearing-house  settlements 
will  be  found  in  the  chapter  on  clearing-houses. 

One  of  the  principal  duties  of  the  paying  teller  is  to 
pay  the  clearing-house  balances.  If  the  balance  is  in  favor 
of  his  bank  he  will  receive  the  amount  and  add  to  his  cash 
holdings;  if  the  balance  is  against  him,  he  will  pay  it. 
In  New  York  these  adjustments  are  now  made  through  the 
Federal  Reserve  Bank. 


-~^, 


e 


0 

C5J 


O 


AN 
CH 


a  «3 
II 


p     03 

66-  (j 


gs  * 
F  % 


eS 


A 

U 


2  & 

<Ii 
18 1 

o  — 
>J  W  - 
&  >5 

ss 

2  P 


tn    H 

i  s 

£  p 

o  ~ 

»*N 

*      O 

3s 


100 


THE    PAYING   TELLER  101 

CASHING  A  CHECK 

Who  has  not  had  a  check  cashed?  And  who  has  not 
watched  the  teller  quickly  scrutinize  it,  reach  for  the  bills, 
pass  them  swiftly  through  his  hands,  hand  them  out  and 
place  the  check  on  the  spindle?  But  what  happens  when  you 
pass  in  a  check  and  say:  "Ten  fives  and  five  ones,  please, 
new  bills"?  What  are  his  mental  processes  as  he  pays  your 
check  and  listens  to  your  comment  on  the  topic  of  the  day? 
It  looks  so  easy — just  count  money  all  day,  and  go  home 
at  three  o'clock — or  six!  Nice  job  this!  No,  not  a  "job,"  but 
a  position,  for  while  he  was  listening  to  you  he  was  glancing 
that  check  over.  He  must  assure  himself:  First,  that  it 
is  genuine.  He  might  know  the  signature  well  enough  to 
pass  on  it  without  reference  to  the  signature  card  in  the 
little  drawers  back  of  him.  It  might  be  drawn  by  an  at- 
torney, an  executor,  a  trustee,  a  guardian,  an  agent;  and  he 
must  not  only  know  that  the  signature  is  genuine,  but  that 
the  authority  is  on  file  and  in  force. 

The  paying  teller  pays  a  forgery  at  the  bank's  peril.  He 
is  bound  in  law  to  know  genuine  signatures.  He  must  be  a 
handwriting  expert.  Checks  are  often  drawn  carelessly. 
Some  people  can  never  write  twice  alike  (and,  as  a  matter 
of  fact,  no  two  signatures  are  ever  exactly  alike — this  being 
one  test  of  forgery),  but  the  characteristics  are  the  same, 
and  can  easily  be  detected. 

Checks  may  be  signed  with  gloved  hands,  cold  hands,  in 
cramped  places,  etc.,  and  while  genuine,  are  difficult  to  pass 
upon  quickly,  and  the  teller  must  not  refuse  a  bona  fide 
check,  for  if  he  does  he  may  invite  trouble.  Checks  of  cus- 
tomers doing  an  active  business  are  easily  remembered;  it  is 
the  infrequent  depositor  who  makes  reference  to  the  signa- 
ture files  necessary,  as  well  as  corporation  checks  where 
several  officials  are  authorized  to  sign. 

Second,  he  must  know  that  the  check  has  not  been 
raised.  If  he  pays  a  forged  check  the  bank  is  liable.  If  he 
pays  a  raised  check  the  bank  is  liable  for  all  over  the  original 
amount.  Therefore,  he  must  see  that  it  is  untampered  with 
— sometimes  a  most  difficult  feat. 

A  check  may  easily  be  altered  by  erasing  the  amount  and 
figures  and  substituting  others.  This  may  be  done  very 
skillfully  with  a  knife  or  with  acids.  Sometimes  checks  are 


<  E 


U    u 

0  X 


102 


o    „« 


as;; 

5)5   6,    <        • 


*    u  U  ^ 

N  3  8  « 

«<  S  %  a 

.-  —  — 

S  as  *< 

54  ,  • 

£  >J  >*  £ 

|«°  S- 

£  W  o  o 


-         < 
P  M  U 

£  w 


fe 

H  8  C 

a  P  o 

fe  o  * 
0  §  h 


THE    PAYING    TELLER  108 

so  carelessly  drawn  that  fraud  is  easy,  and  it  is  a  question 
if  the  fraud  was  invited  by  carelessness.  It  has  been  held 
that  a  bank  depositor  is  liable  where  he  draws  a  check  care- 
lessly and  makes  fraud  easy.  The  use  of  safety  paper — a 
paper  with  a  thin  coating  on  it  which  prevents  any  erasure 
without  becoming  noticeable — is  becoming  more  and  more 
common. 

WOEDS  AND  FIGURES 

Checks  usually  have  the  amount  in  two  places,  expressed 
in  both  words  and  figures.  If  these  two  are  in  agreement, 
there  is  no  question  as  to  the  maker's  intention  as  to  amount; 
but  if  they  vary,  the  question  arises  as  to  which  controls. 
The  Negotiable  Instruments  Law  gives  the  following  in- 
structions: "Where  the  sum  payable  is  expressed  in  words 
and  also  in  figures,  and  there  is  a  discrepancy  between  the 
two,  the  sum  denoted  by  the  words  is  the  sum  payable;  but 
if  the  words  are  ambiguous  or  uncertain,  reference  may  be 
had  to  the  figures  to  fix  the  amount." 

The  teller  is,  therefore,  justified  and  protected  in  paying 
the  amount  expressed  in  words,  the  law  recognizing  the  fact 
that  a  man  is  more  apt  to  express  his  intentions  when  writ- 
ing the  amount  in  words  with  deliberation  than  in  making 
figures,  although  in  practice  it  is  quite  likely  to  be  the  re- 
verse. Some  tellers  make  it  a  rule  to  pay  the  lesser  amount, 
irrespective  of  whether  words  or  figures  express  it. 

Any  erasures  should  be  carefully  investigated,  for  any 
material  alteration  will  void  the  instrument.  The  use  of 
safety  paper  is  to  be  encouraged  in  this  respect,  inasmuch 
as  any  change,  however  slight,  will  readily  appear. 

Third,  he  must  see  that  it  is  not  dated  ahead.  The 
authority  of  a  bank  to  pay  is  only  good  when  the  date  of  the 
check  is  of  the  same  day  or  an  antecedent  day.  The  teller 
must  not  pay  a  check  to-day  which  is  dated  to-morrow,  for 
by  to-morrow  the  maker  may  put  a  stop  order  on  it  and  can- 
cel the  check.  He  must  watch  the  dates. 

If  the  check  is  not  dated  at  all  the  teller  can  be  satisfied 
about  that  detail,  for  the  Negotiable  Instruments  Law  pro- 
vides that  "where  the  instrument  is  not  dated,  it  will  be  con- 
sidered to  be  dated  as  of  the  time  it  was  issued."  The  teller 
can  fill  in  the  date  as  of  the  day  presented,  without  incur- 


c^A         *'»™  ^V-'    rsXv  \LV-Ni  i-*** 

ItlP^lS. 

=*  * 1.    ^\         V^-«*         J5 

'*&  <*« 

.     BBS 


r* 


THE    PAYING    TELLER  105 

ring  responsibility,  although  it  would  seem  a  better  practice 
to  have  the  person  presenting  the  check  attend  to  this. 

If  the  check  is  post-dated  the  teller  should  refuse  to  pay 
until  the  date  borne  by  the  check  arrives.  If  he  should  pay 
before  the  date  and  the  maker  of  the  check  suffers  any  dam- 
age by  reason  of  it,  the  bank  is  liable. 

Should  the  check  bear  a  date  considerably  previous  to  the 
time  of  presentation,  it  is  what  is  known  as  a  stale  check  and 
puts  the  teller  on  inquiry.  As  to  how  old  a  check  must  be 
to  be  considered  stale,  has  not  been  decided  by  the  law.  A 
check  a  month  old  has  been  decided  not  to  be  stale,  but  one 
five  months  old  has  been  so  considered.  The  teller  must  de- 
cide this  question  after  a  consideration  of  all  the  facts.  If 
he  knows  the  maker  and  the  person  presenting  and  indors- 
ing it;  if  he  feels  certain  it  is  all  right  and  the  maker  has 
funds  to  pay  it,  he  can  take  the  chance.  He  should,  however, 
come  to  this  conclusion  bearing  clearly  in  mind  that  he  is 
assuming  some  risk. 

IDENTIFICATION 

Fourth,  he  must  know  you,  or  you  must  be  identified. 
The  check,  presuming  it  to  be  drawn  by  a  third  party  to 
your  order,  or  indorsed  to  your  order,  is  payable  to  you,  and 
payment  to  anyone  else  is  unwarranted,  and  not  good.  It 
may  be  a  bearer  check,  payable  to  holder,  but  most  checks 
are  payable  to  designated  payees,  and  this  one,  let  us  sup- 
pose, is  payable  to  you.  Therefore,  he  must  pay  you  and 
you  only.  And  to  identify  you  may  be  difficult.  You  are 
not  known.  You  offer  to  bring  in  your  chauffeur;  your 
lawyer;  your  wife;  and  the  teller,  sad  to  relate,  does  not 
know  either.  You  produce  a  letter  addressed  to  yourself 
and  say:  "There,  you  see.  I  got  this  check  in  a  letter  this 
morning."  "Yes,"  the  teller  observes,  mentally,  "but  you 
might  have  stolen  it  from  the  mails.  How  do  I  know?"  Of 
course,  the  teller  doesn't  say  so  in  words,  but  shakes  his 
head  and  says:  "We  must  have  someone  whom  we  know." 
He  must  use  judgment  and  tact  in  getting  identification, 
and  in  the  case  of  small  checks,  such  matters  as  letters,  mon- 
ograms and  other  documents  in  the  bearer's  possession  may 
be  accepted.  The  indorsement  of  one  of  the  bank's  cus- 
tomers is,  of  course,  the  best  identification — if  it  is  genuine. 


106 


THE   PRACTICAL  WORK  OF   A  BANK 


THE    PAYING    TELLER  107 

And  in  being  firm  but  kind,  the  teller  often  has  to  take  abuse 
for  being  so  "very  particular" — "finicky,"  as  a  woman  would 
put  it,  forgetting  what  the  risk  really  is  and  how  many  losses 
and  headaches  tellers  have  had  by  taking  a  chance  and  losing. 

One  instance  will  illustrate  the  attitude  of  mind  of  some 
people  toward  the  paying  teller.  Some  years  ago  a  man 
presented  for  payment  a  check  for  a  fairly  large  amount 
and  had  some  difficulty  in  producing  satisfactory  evidence  of 
his  identity.  Finally,  he  rolled  back  his  sleeve  and  showed 
his  arm  upon  which  was  tattooed  his  full  name.  "There, 
young  feller,"  he  exclaimed  to  the  teller,  "do  you  think  I 
stole  the  skin?"  In  another  case  a  woman  presented  a 
check  for  too  large  an  amount  to  take  a  chance  on,  and  after 
telephoning  to  the  drawer  and  getting  a  satisfactory  identi- 
fication the  teller  cashed  the  check.  As  the  woman  took  her 
money  she  said:  "You  must  have  a  lot  of  crooks  coming  in 
here."  As  to  telephone  identification,  unless  the  teller  is 
quite  familiar  with  the  voice  of  the  party  claiming  to  be  talk- 
ing, such  identification  is  dangerous  to  accept. 

A  few  years  ago,  on  a  Saturday  morning,  the  paying 
teller  of  a  bank  was  called  up  on  the  telephone  by  a  man 
representing  himself  to  be  the  cashier  of  a  corporation  keep- 
ing a  large  account  with  the  bank.  He  stated  that  the  clerk 
who  ordinarily  went  to  the  bank  was  sick,  and  that  he  was 
sending  a  new  man  with  a  check  for  $1,200,  which  he  wished 
to  have  cashed,  and  gave  a  full  description  of  the  man  who 
would  call  for  the  money.  This  seemed  all  in  good  form, 
and  later  on  a  young  man  answering  the  telephone  descrip- 
tion appeared  at  the  teller's  window  with  the  described 
check.  He  remarked  to  the  teller  that  the  cashier  telephoned 
about  his  calling  for  the  money.  Something  aroused  the 
teller's  suspicion,  and  he  immediately  telephoned  the  cor- 
poration office  for  a  confirmation  and  found  that  no  such 
message  or  messenger  had  been  sent.  The  impostor  made 
his  escape,  leaving  the  check,  which  proved  to  have  been 
taken  from  the  back  of  the  check  book  and  the  signatures 
cleverly  forged. 

It  is  suggested  that  when  identification  is  obtained  it 
be  in  the  nature  of  an  indorsement  if  possible,  so  that  in 
case  of  subsequent  trouble  the  one  identifying  the  party  to 
whom  payment  was  made  may  at  least  be  located,  if  not 
held  liable  for  the  fraud. 


108  THE    PRACTICAL  WORK  OF   A   BANK 


IRVING  NATIONAL  BANK 


TO 

irwiiNO   i 

NEW    YORK. 


PLEASE    STOP    PAYMENT    ON    OUR- 

DATED NUMBERED 

TO     THE      ORDER     OF 


FOR  $ WHICH  HAS  NOT   BEEN    CHARGED  AGAINST  OUR 

ACCOUNT    ON    THE    STATEMENT    FOR    ANY    PREVIOUS    MONTH. 

IF    DUPLICATE    OF    ABOVE    IS    PRESENTED,    PLEASE     PAY   AND    CHARGE 
TO    OUR    ACCOUNT. 


WE  UNDERSTAND  THAT  YOU  WILL  USE  YOUR  BEST  EFFORT  TO  AVOID  PAYMENT  OF  THE  ITEM 
MENTIONED  ABOVE.  BUT  AGREE  NOT  TO  HOLD  YOU  LIABLE  ON  ACCOUNT  OF  PAYMENT  CONTRARY 
TO  THIS  REQUEST  SHOULD  IT  BE  OCCASIONED  THROUGH  INADVERTANC6  OR  ACCIDENT 


SIGNATURE. 
ADDRESS 


THIS    REQUEST     TO     BEAR     ONLY    SIGNATURE     AUTHORIZED    ON     CHECKS. 
IF   ORIGINAL    BE    RETURNED    PLEASE    CANCEL    THIS    ORDER. 

IN     ISSUING     DUPLICATE    CHECK    PLEASE    WRITE    DUPLICATE    ACROSS    FACE    OF 
CHECK    OVER     AUTHORIZED     SIGNATURE 


STOP    PAYMENT   NOTICE 


THE    PAYING    TELLER  109 

CROSSED  CHECKS 

In  England  the  banks  have  been  by  law  relieved  of  re- 
sponsibility for  cashing  checks  without  identification,  and  an 
English  teller  will  hand  out  money  all  day  without  thought 
as  to  whether  the  one  standing  at  the  window  is  entitled  to 
the  funds  or  not.  But  the  English  custom  gives  the  bank 
protection  in  what  is  known  as  the  "crossed  check,"  which  is 
merely  the  drawing  of  two  parallel  lines  across  the  face  of 
the  check  and  writing  "&  Co."  between.  This,  in  effect,  re- 
stricts the  presentation  of  the  check  for  payment  by  any 
other  than  a  bank.  And,  in  effect,  it  prohibits  the  party 
from  collecting  the  check  except  through  his  bank.  By  act 
of  Parliament  a  bank  is  prohibited  from  paying  checks  that 
are  crossed  over  the  counter.  If  the  drawer  knows  the 
payee's  bank,  he  can  cross  it  "specially"  by  writing  the  name 
of  the  bank  between  the  lines,  and  it  can  then  only  go 
through  that  channel. 

STOP  PAYMENT 

Fifth,  the  teller  must  assure  himself  that  payment  has 
not  been  stopped  on  the  check.  It  is  the  maker's  right  to 
draw  checks  as  often  and  for  as  much  as  his  bank  balance 
warrants;  and  he  has  the  legal  right  to  stop  payment  on  a 
check  at  any  time  before  it  is  actually  paid;  therefore,  if  he 
notifies  the  bank  not  to  pay  his  check  and  payment  is  made, 
the  bank  cannot  charge  his  account  with  the  amount.  These 
stop  payment  orders  cause  much  confusion  and  give  the 
tellers  much  concern,  and  are  a  source  of  annoyance;  but  as 
long  as  this  is  the  law  and  the  custom,  it  must  be  part  of  the 
teller's  duties  to  watch  out  for  the  stop  payments.  It  is 
one  of  the  paying  teller's  duties  to  see  that  no  such  check 
shall  be  cashed  by  him. 

A  card  is  made  out  for  the  paying  teller's  cage  which  has 
a  space  for  the  date,  number,  amount,  payee's  name  and 
signature  of  the  depositor,  and  also  for  the  date  when  the 
order  to  stop  payment  was  received  by  the  bank.  Below 
there  are  spaces  to  record  the  date  of  presentation  for  pay- 
ment, and  for  date  of  cancellation  over  the  depositor's  signa- 
ture, also  for  the  bookkeeper's  initials,  to  show  his  receipt  of 
the  notice.  A  second  form  is  for  the  bookkeeper  and  con- 
tains the  essential  data  of  the  other  card. 


110  THE   PRACTICAL  WORK  OF   A   BANK 

These  stop-payment  cards  should  be  filed  in  the  paying 
teller's  cage  in  some  form  for  instant  reference.  In  addition, 
a  visible  file  may  be  used  containing  the  most  recent  stops, 
for  these  are  the  most  dangerous.  A  check  which  is  long 
antedated  will  almost  surely  catch  the  teller's  eye  and  send 
him  to  his  stop-payment  file,  for  the  best  of  memories  is  a 
treacherous  faculty.  In  filling  out  these  stop-cards  the  de- 
positor's signature  is  always  to  be  obtained  when  possible. 

If  the  request  to  stop  payment  is  received  by  telephone  a 
confirmation  by  letter  should  be  asked  for,  and  when  a  stop- 
payment  letter  is  received  that  fact  should  be  noted  on  the 
card  with  the  date  of  receipt,  and  the  letter  preserved  for 
reference  either  in  a  file  for  that  purpose  or  among  the  let- 
ters of  the  day.  The  cancellation  of  a  stop-payment  order 
should  always  be  made  over  the  signature  of  the  drawer, 
either  upon  the  card  itself  or  by  letter.  These  are  by  their 
nature  a  matter  of  record,  an  essential  point  in  any  trans- 
action involving  the  payment  of  money. 

Checks  coming  through  three  sources,  the  paying  teller, 
the  clearing-house  and  the  mails,  there  must  be  a  record  of  a 
stop  payment  in  each  place  where  the  check  will  be  passed 
upon  before  paying.  In  some  banks  this  is  merely  a  memo- 
randum placed  somewhere  where  the  bookkeeper  or  teller,  or 
both,  can  see  it;  but  such  methods  are  not  to  be  encouraged; 
there  should  be  order  above  all  things.  Of  course,  when  a 
check  upon  which  payment  has  been  stopped  is  presented  it 
is  so  marked  that  it  cannot  circulate  further.  A  slip  may  be 
attached  or  memo  made  on  the  back,  preferably  the  former. 
Payment  may  be  stopped  on  a  check  by  legal  process.  The 
law  may  prevent  its  payment.  The  account  may  be  gar- 
nisheed,  and  if  so,  no  checks  should  be  paid  while  the  process 
is  effective.  And  in  case  of  controversies  in  organizations, 
where  factional  fights  have  developed,  payment  may  be  sus- 
pended until  the  bank  is  certain  of  its  authority  to  pay,  es- 
pecially if  it  has  had  notice  that  there  is  irregularity  in  the 
election  of  officers  or  other  causes  of  which  it  should  take 
cognizance.  If  the  ownership  of  the  account  is  in  doubt,  the 
easier  course  is  to  pay  the  money  into  court  and  let  the 
disputants  settle  the  matter  between  them. 

Lastly,  the  teller  must  be  certain  that  the  drawer  is  good 
for  the  amount.  In  a  small  bank,  the  teller  may  keep  his 
ledger  where  the  cashier  keeps  his  credit  department — 


Fona  ir-BM-4-fS-S. 

STOP  PAYMENT 


THE    PAYING   TELLER 


Copy  to  all  otkr  Tcllm  onj 


111 


National  Exchange  Bank 

Roanolce,  VirninU 


Check  of. 


Number -  Doled ,....   Amount,  f.. 


Payable  to..... 

Duplicate  Issued  < 
Memo: 


KM 


Information 

Receited  by. 


(Letter 

Authority  <  'Phone      Filed.. 
I  Personal 


AM. 
P.M. 


Stop  Payment  Withdrawn _.. 

STOP    PAYMENT    CARD FILED    IN    TELLER'S    AND    BOOKKEEPER'S   DEPARTMENTS 


"under  his  hat" ;  but  in  a  large  bank  this  is  impossible.  Of 
course,  some  accounts  are  so  steady  that  the  teller  knows 
that  they  are  never  overdrawn,  always  good  for  all  checks 
issued  and  need  concern  himself  only  that  the  above  tests  are 
met ;  while  other  accounts  are  so  uncertain,  so  generally  near 
the  danger  line,  that  to  make  a  payment  without  verifying 
the  balance  would  invite  an  overdraft. 

Credit  is  a  timid  creature  and  easily  shocked;  and  the 
credit  of  the  maker  must  not  be  injured  while  the  teller  is 
verifying  the  balance.  To  shout  out  so  that  all  in  the  lobby 
can  hear:  "Is  William  Smith  good  for  fifty-five  dollars?" 


STOP  PAYMENT  ACCOUNT  OF 


HECEIVEO 

OATI 

CM'E'OK 

PAYABLE    TO 

NUMBER 
Of 

AMOUNT 

ITtH 

•ictivEO 

DUPLICATE 

REMARKS 

STOP    PATMENT — LOOSE    LEAF   REGISTER 


112  THE    PRACTICAL  WORE   OF   A   BANK 

would  do  Mr.  Smith  an  injury  and  certainly  be  undiplo- 
matic on  the  part  of  the  teller.  He  must  get  the  information 
in  some  quiet  manner.  In  the  unit  system,  elsewhere  de- 
scribed, he  can  refer  the  check  to  the  bookkeeper,  who  is  near 
at  hand,  but  in  some  banks,  this  individual  is  far  away,  it 
may  be  ten  stories  above,  and  so  other  methods  are  used. 
First  comes  the  telautograph  which  reproduces  the  hand- 
writing of  the  teller  on  a  roll  of  paper  in  the  other  depart- 
ment. He,  therefore,  presses  a  button  and  writes  "William 
Smith  fifty-five?" 

The  clerk  at  the  other  end  writes  back,  "yes,"  and  the 
teller  pays  it,  and  no  one  but  the  two  know  about  the  trans- 
action by  wire.  There  is  also  the  interior  telephone,  the 
pneumatic  tube  and  messengers,  but  the  end  and  aim  of  all 
is  to  get  the  information  quietly  and  quickly.  And  becom- 
ing satisfied  on  all  these  points,  he  pays  the  money  as  you 
direct  him,  in  "ten  fives  and  five  ones,"  spindles  the  check2 
and  the  transaction  is  closed.  It  may  have  taken  but  a  few 
seconds'  time,  but  much  has  been  done  in  that  short  period. 

Checks  are  occasionally  made  out  in  pencil,  and  this  prac- 
tice, while  rare,  is  sometimes  bothersome.  Such  a  check  may 
be  easily  altered;  and  while  the  law  would,  no  doubt,  hold 
such  a  check  good,  it  being  nowhere  said  that  a  pencil  is  not 
a  proper  writing  instrument,  yet  the  practice  is  so  fraught 
with  danger  that  only  small  checks  should  be  so  accepted. 
The  risk  of  the  bank  is  great  enough  in  any  event  without 
adding  the  temptation  to  easy  alteration. 

BEARER  CHECKS 

A  check  payable  to  bearer,  "cash,"  "currency,"  or  to  a 
fictitious  payee  is  payable  to  bearer  and  the  teller  may  cash 
it  without  identification  or  indorsement.  It  is  negotiable  by 
delivery.  But  as  a  matter  of  precaution  all  such  checks 
should  be  indorsed,  and  bearer  checks  should  not  be  encour- 
aged. So  far  as  the  author  has  been  able  to  determine, 
there  is  no  case  which  covers  the  point  as  to  whether  or  not 
a  bank  may  insist  upon  indorsement  as  a  requisite  to  cash- 
ing a  check  payable  to  bearer;  but  as  a  matter  of  record,  to 
trace  the  course  of  the  instrument  and  to  fix  the  liability  of 
the  party,  his  indorsement  should  be  obtained.  A  man  who 

*The  mutilation  or  cancellation  is  to  prevent  further  negotiation. 


THE    PAYING    TELLER  113 

will  not  indorse  a  check  upon  which  he  receives  payment  is 
either  worthy  of  suspicion  or  a  stickler  for  conventionalities. 

Mr.  William  McChesney  Martin  of  the  St.  Louis  Fed- 
eral Reserve  Bank  tells  of  this  incident: 

"An  account  was  opened  for  ahout  seven  hundred  dol- 
lars. When  the  book  was  first  balanced  all  had  been  drawn 
out  except  about  fifty  dollars.  Shortly  after  receiving  his 
cancelled  checks  the  depositor  came  in  and  claimed  that  some 
three  hundred  and  fifty  dollars  had  been  paid  out  on  forged 
checks.  He  exhibited  these  checks.  They  were  all  for  small 
amounts  payable  to  bearer,  and  none  of  them  had  been  en- 
dorsed. Upon  an  investigation  it  seemed  clear  that  the 
checks  in  question  had  all  been  signed  by  the  depositor  him- 
self, but  in  a  disguised  hand,  his  intention  being  to  claim 
that  they  were  forgeries.  Every  handwriting  expert  to 
which  they  were  submitted  came  to  this  conclusion  and  detec- 
tives reported  that  the  man  was  a  member  of  a  gang  who 
were  equal  to  this  kind  of  thing.  The  bank  refused  to  con- 
sider the  checks  forgeries  and  refund  their  amount  and  the 
depositor  sued.  In  the  search  that  was  commenced  for  evi- 
dence, it  developed  that  someone  had  handed  these  bearer 
checks  to  some  mature  newsboys  found  on  the  street,  and 
would  give  them  a  quarter  or  half  dollar  to  go  in  and  cash 
them.  The  boys,  however,  who  actually  cashed  the  checks 
could  never  be  found,  with  the  result  that  the  bank  had  to 
go  to  trial  without  any  witnesses  except  handwriting  ex- 
perts. The  case  was  compromised,  the  bank  being  glad  to 
get  off  with  a  partial  payment  of  the  amount  claimed, 
though  certain  it  was  being  imposed  upon.  If  these  bearer 
checks  had  contained  the  names  of  the  persons  presenting 
them,  these  persons  could  have  been  found,  and  the  bank 
would  not  have  been  a  victim  of  fraud.  Since  the  experience 
of  that  bank,  it  has  never  cashed  a  bearer  check  without  re- 
quiring the  name  of  the  person  presenting  it." 

THE  CERTIFICATION  OF  CHECKS 

The  certification  of  a  check  being  essentially  payment 
(the  depositor's  account  is  charged  and  certified  checks  ac- 
count credited),  and  the  holder  being  powerless  to  revoke 
the  check  after  it  is  certified,  and  the  bank  becoming  liable 
for  the  check  as  soon  as  it  certifies,  it  follows  that  the  sanr* 


114 


ceremony  is  necessary  as  obtains  in  paying  a  check;  except 
that  the  bank  need  not  assure  itself  that  the  holder  is  the 
rightful  owner,  for  it  may  certify  "Good  when  properly  in- 
dorsed." The  usual  method  is  to  write  the  words : 


Certified  for  $. 

Date   

Signature  


Right  here  let  it  be  said  that  the  certification  stamp 
should  have  plenty  of  ink  on  it.  So  very  many  certifications 
are  faint  and  hardly  discernible  that  it  must  be  exceedingly 
annoying  to  have  to  strain  the  eye  to  ascertain  the  certifica- 
tion. And  where  it  is  certified,  as  frequently  happens,  "Cer- 
tified, payable  at  the  Blank  Trust  Company" — a  custom 
that  obtains  in  many  large  cities,  where  small  banks  will  cer- 
tify through  their  clearing  agent,  a  little  care  as  to  ink  pads 
will  be  timely,  and  save  a  multitude  of  harsh  thoughts. 

The  bank  is,  as  above  stated,  liable  for  its  certification 
whether  the  drawer  is  good  or  not,  and  should  only  certify 
against  actual  balances.  There  was  a  custom,  now  fast 
dying  out,  particularly  in  stock  exchange  transactions,  for 
banks  to  over-certify,  in  fact,  certify  to  that  which  did  not 
exist.  This  is  against  good  banking  principles.  The  bank 
would  often  agree  to  certify  up  to  a  certain  amount,  and 
thus  become  liable  for  the  amount  so  certified  irrespective  of 
Hie  borrower's  account.  One  large  bank  in  New  York  was 
•vrecked  by  this  practice.  It  is  no  longer  in  favor  with  good 
banks,  being  a  loan  without  security,  and  in  many  jurisdic- 
tions is  forbidden  by  law. 

In  certifying,  a  record  is  kept  of  the  number  and 
mnount  of  the  check,  date  and  depositor's  name  and  payee. 
This  is  generally  put  through  by  the  teller  in  the  form  of 
ticket,  which  becomes  the  bookkeeper's  authority  to  make 
the  charge.  When  the  check  comes  in  it  will  be  filed  with 
the  ticket  among  the  vouchers. 

The  general  bookkeeper  has  a  certified  check  rec- 
ord giving  the  full  details,  and  enters  the  date  of  payment 
against  the  items.  The  balance  of  this  account  is  the  total 
amount  of  certified  checks  outstanding. 

In  cities  where  stock  exchange  transactions  are  numer- 
ous, certification  plays  an  important  part  in  the  financial 
operations  and  is  a  very  important  function  of  the  teller. 
He  is  furnished  every  morning  with  a  list  of  brokers  and 
their  morning  balances.  Provision  is  made  for  the  entry  of 


THE    PAYING    TELLER  115 

deposits  and  checks  that  pass  through  during  the  day.  The 
receiving  teller  advises  the  paying  teller  of  deposits  made  on 
these  accounts,  and  the  paying  teller  enters  checks  certified, 
so  that  he  has  the  balance  always  before  him.  As  soon  as  the 
clearings  of  the  day  are  over  and  charges  made  to  the  ledgers 
these  amounts  are  deducted  from  the  morning  balance  as 
shown  on  the  sheet,  so  that  the  teller  has  accurate  informa- 
tion all  day  as  to  the  status  of  the  broker's  account. 

The  payment  of  a  debt  in  the  form  of  a  certified  check 
does  not  become  effective  if  the  bank  fails  before  the  check 
can  be  presented.  An  action  would  lie  against  the  bank  as 
well  as  against  the  one  from  whom  it  was  received;  but 
where  a  check  is  given  for  payment  and  the  holder  has  it 
certified  and  the  bank  fails  before  making  payment,  the 
maker  or  indorser  cannot  be  held,  on  the  ground  that  the 
holder  had  the  option  of  taking  money  or  certification,  and 
by  taking  the  certification  absolutely  released  the  maker  of 
the  check. 

It  is  settled  law  that  a  bank  does  not  have  to  certify  a 
check.  It  can  only  be  required  to  pay  the  money,  but  if  ft 
sees  fit  to  assume  the  responsibility  of  certifying,  it  has  a 
perfect  right  to  do  so.  It  also  has  a  right  to  charge  the 
drawer's  account  with  the  amount  of  the  check,  even  though 
the  request  to  certify  the  check  is  an  oral  direction  and  the 
only  evidence  the  bank  has  of  a  proper  demand  is  the  word 
of  its  teller  as  recorded  in  the  certified  check  register. 

In  a  Missouri  case,  Bank  of  Springfield  v.  The  First 
National  Bank  of  Springfield  (30  Mo.  App.  271),  the  rea- 
son is  well  explained.  The  court  said:  "The  certification  r.f 
checks  is  well  known  to  be  one  of  the  greatest  dangers  to  the 
irtegrity  of  their  funds  with  which  banks  have  to  contenJ. 
The  power  to  certify  checks,  unless  guarded  and  restrained, 
is  nothing  less  than  the  power  of  a  corrupt  teller,  or  other 
servant,  to  give  away  the  funds  of  the  bank.  Such  abuses 
have  been  produced  by  the  exercise  of  this  power  that  pru- 
dent banks,  as  is  well  known,  have  generally  discontinued 
the  practice  of  certifying  checks  and  have  substituted  there- 
for the  practice  of  taking  up  the  check  tendered  for  certifica- 
tion and  issuing  in  its  place  their  own  cashier's  check  which 
is  tantamount  to  their  own  promissory  note." 

It  is  a  common  practice  for  all  New  York  City  banks  to 
certify  checks.  This  is  doubtless  due  to  the  fact  that  many 


116  THE    PRACTICAL   WORK   OF   A   BANK 

large  payments  are  made  daily  and  this  is  the  easiest  way  to 
handle  them.  Checks  are  also  certified  to  a  considerable  ex- 
tent by  banks  throughout  the  country.  In  St.  Louis  and 
other  places,  however,  financial  institutions  make  it  a  rule 
not  to  certify  checks,  and  whenever  they  do  so  are  certain 
that  it  is  impossible  for  their  customer  to  transact  the  par- 
ticular business  in  hand  without  such  accommodation. 

Another  point  is  to  guard  against  certifying  before  or 
after  bank  hours  for  any  person  except  the  drawer  of  the 
check.  Of  course  a  bank  will  accommodate  a  depositor  by 
certifying  upon  his  demand  whenever  there  is  a  proper  of- 
ficer to  sign,  but  there  is  an  element  of  danger  in  certifying 
before  and  after  hours  for  a  third  party.  A  condition  of 
affairs  like  this  might  arise :  A  depositor  might  issue  a  check 
after  bank  hours  and  then  find  that  there  was  an  error  in  the 
amount  or  that  the  check  was  fraudulently  procured  and 
would  wish  to  stop  payment.  Relying  upon  the  lateness  of 
the  hour  he  might  notify  the  bank  by  mail  to  stop  payment, 
knowing  that  the  notice  would  be  received  by  the  bank  be- 
fore it  opened  for  business  the  next  morning;  or  he  might 
even  telephone  at  the  time  of  discovery,  only  to  learn  in 
either  case  that  it  was  too  late.  It  would  doubtless  result  in 
loss  to  the  bank. 

THE  PROTECTION  OF  BANK  CHECKS 

The  principal  risk  which  a  bank  runs  to-day  is  not  that 
of  the  burglar  or  the  sneak  thief,  although  they  are  oper- 
ating everywhere,  particularly  in  the  small  places;  but  even 
in  the  large  cities,  the  sneak  thief  occasionally  manages  to 
make  a  good  haul  in  broad  daylight  and  in  a  bank  using 
every  precaution.  In  a  recent  instance  in  Brooklyn,  $10,000 
was  stolen  from  the  cage  during  the  noon  hour,  while  the 
teller  was  for  the  moment  disengaged. 

In  328  cases  of  bank  frauds  in  a  single  year,  all  but 
twenty  were  cases  of  forgery,  and  the  risk  in  banking  to- 
day is  that  of  the  check  forger,  who  either  passes  bogus 
checks  or  raised  instruments.  Speaking  on  this  subject  at 
various  times,  William  J.  Burns,  the  famous  detective,  has 
said:8 

•From  "What   Burns   Says,"  pamphlet   issued  by  the  G.   W.   Todd  Co.,   of 
Rochester,  N.  Y. 


THE    PAYING    TELLER  117 

"Now,  as  between  merely  forged  documents  (manufac- 
tured 'out  of  whole  cloth')  and  the  genuine  document  on 
which  the  amount  is  'raised'  or  altered,  the  danger  to  those 
signing  and  handling  the  altered  instrument  is  infinitely 
greater.  In  fact,  from  some  of  the  remarkable  examples  of 
'raised'  checks,  drafts,  stock  certificates  and  promissory 
notes  that  I  have  examined  lately,  it  would  indicate  that  the 
'raised'  amount  is  more  dangerous  to  the  financial  peace  of 
organized  society  than  the  nitro-glycerine  can  of  the  profes- 
sional dynamiter. 

EASE  OF  OBTAINING  GENUINE  CHECKS  FOR  "RAISING" 

"The  methods  of  the  forger,  too,  in  obtaining  checks 
signed  by  responsible  men  and  business  houses  are  most  in- 
teresting, as  showing  how  difficult  it  is  to  guard  against  the 
'check  raiser.'  For  instance,  they  have  developed  a  trick 
lately  of  sending  a  small  but  perfectly  good  check  of  their 
own  to  some  business  house.  Then,  after  there  has  been 
plenty  of  time  for  it  to  be  duly  deposited,  there  follows  a 
polite  letter,  notifying  the  intended  victim  that  a  mistake 
was  made  in  sending  this  check,  that  it  should  have  been  ad- 
dressed to  another  house  of  similar  name  in  another  city,  and 
will  they  kindly  return  the  money? 

"In  complying  with  this  perfectly  proper  (?)  request, 
the  average  business  concern  naturally  responds  by  sending 
its  own  check  for  the  amount  to  the  writer  of  the  letter,  ex- 
plaining that  his  check  had  been  deposited  before  his  letter 
arrived.  And  this  check,  by  the  way,  is  invariably  for  a 
very  small  amount,  as  the  'check  raiser'  does  not  care  to  in- 
vest more  actual  money  than  is  really  necessary. 

"You  will  see  that  a  $5  check  signed  by  a  good  concern  is 
just  as  good  for  his  purpose  as  a  $5,000  one,  because  he  can 
twist  the  'five'  into  'five  thousand'  with  very  little  trouble 
and  only  a  drop  or  two  of  acid  and  another  drop  or  two  of 
ink — provided  the  concern  has  not  taken  the  thoughtful  pre- 
caution to  protect  its  check  before  sending  it  to  the  polite 
stranger.  (And,  by  the  way,  it  is  amazing  how  many  other- 
wise conservative  concerns  there  are  in  this  country  that  will 
safeguard  everything  connected  with  their  business  except 
their  own  signatures — which  represent  all  the  rest  of  their 
property  put  together!) 

"On  receiving  the  little  genuine  check,  the  forger  then 


118  THE    PRACTICAL  WORK  OF   A   BANK 

performs  his  interesting  operation  by  the  use  of  bleaching 
acids,  removing  the  design  of  the  paper  if  necessary,  and  re- 
storing it  after  the  amount  has  been  altered  to  suit  his  needs. 
He  fills  up  perforations,  or  punchings,  if  necessary,  and  the 
inks  of  the  best  manufacturers  are  scarcely  proof  against  his 
skill,  since  he  can  remove  even  printing  and  lithographic  ink 
when  necessary.  Moreover,  in  many  cases,  it  is  not  required 
to  remove  anything  at  all,  as  many  small  amounts  can  be 
changed  by  'penning' — simply  adding  a  few  pen  strokes  to 
the  original  amount — and  there  you  are! 

"When  the  alteration  is  finally  discovered  by  the  concern 
that  issued  the  check,  the  question  is,  'How  are  you  going  to 
prove  the  alteration  ?'  Or,  'Which  one  of  the  several  endors- 
ers on  this  check  was  the  guilty  party  ?'  It  is  a  very  difficult 
situation,  and  one  that  can  rarely  be  cleared  up  to  the  satis- 
faction of  the  bank,  its  depositor,  the  correspondent  banks, 
and  others  concerned. 

"I  might  mention  that  we  have  recently  investigated 
cases  where  they  managed  to  alter  checks  in  such  a  way  that 
they  actually  left  no  loophole  through  which  to  prove  the 
fraud  and  indict  them  for  forgery — and  they  accomplished 
it  in  somewhat  the  following  manner: 

CASHING  A  "STOP  PAYMENT"  CHECK 

"Orders  had  been  given  to  a  bank  to  stop  payment  on  a 
certain  check  for  a  certain  amount,  payable  to  a  wholesale 
house,  dated  on  such  a  day,  number  so-and-so.  It  was  be- 
lieved that  the  check  had  been  stolen.  Twice  within  two 
months  the  bank  was  reminded  to  be  on  the  lookout  for  this 
check — and  then,  in  the  last  hour  of  a  busy  Saturday  morn- 
ing during  the  third  month,  the  check  slipped  through.  But 
the  bank  was  not  to  blame. 

"The  forger  had  first  'raised'  the  amount  by  several  hun- 
dred dollars.  Then  he  changed  the  number  of  the  check,  and 
brought  the  date  right  up  to  that  very  day,  as  though  the 
check  had  been  given  to  him  only  a  few  minutes  previous  to 
his  appearance  at  the  bank — although  the  check  was  really 
nearly  four  months  old.  Lastly,  he  had  removed  the  name 
of  the  rightful  payee  (the  wholesale  house)  and  written  his 
own  name  instead,  so  that  he  did  not  have  to  forge  an  in- 
dorsement. He  was  properly  identified,  indorsed  the  check 
with  his  own  name,  took  the  money — and  disappeared. 


THE    PAYING    TELLER  119 

There  was  absolutely  nothing  of  the  original  writing  left  but 
the  genuine  signature.  How  could  you  blame  the  bank? 

"Moreover,  the  work  was  so  perfectly  executed  that  it  is 
doubtful  if  it  would  have  been  possible  to  prove  the  altera- 
tion even  if  the  swindlers  had  been  caught.  They  were  not, 
for  the  fraud  was  not  discovered  until  nearly  two  weeks 
later,  when  the  signer  of  the  check  looked  over  his  bank  ac- 
count and  found  it  short. 

"I  have  told  you  all  of  this  in  detail,  so  you  will  under- 
stand that  I  have  a  reason  for  the  statement  that  it  behooves 
eveiy  bank  to  see  to  it — and  every  business  house  as  well — 
that  all  precautions  are  taken  in  making  out  their  checks, 
regardless  of  the  responsibility  or  honesty  of  the  party  to 
whom  they  are  issued. 

"The  most  practical  plan,  I  think,  up  to  the  present  time 
at  least,  is  to  use  a  Protectograph,  limiting  the  amount  of 
the  check  by  forcing  a  heavy  ink  into  the  body  of  the  paper 
under  high  pressure.  This  limit  does  not  leave  any  profit- 
able margin  to  pay  the  swindlers  for  their  exacting  work 
and  the  risk  of  punishment,  so  it  may  be  considered  scien- 
tific protection,  and  represents  the  highest  development  thus 
far  in  the  field  of  anti-forgery  devices.  (See  note  page  144.) 

ADVISE  DEPOSITORS  How  TO  STAMP  CHECKS 

"I  would  suggest  in  using  the  Protectograph  that  the 
limit  be  stamped  just  above  the  signature  and  in  close  prox- 
imity to  it,  so  that  any  attempt  to  tamper  with  the  check 
will  necessarily  result  in  defacing  the  signature,  which  alone 
gives  the  check  its  value. 

"In  New  York  and  other  cities  we  are  constantly  find- 
ing proof  of  the  cunning  employed  by  these  crooks  to  gain 
their  ends,  and  I  will  give  you  a  few  illustrations  to  show 
how  difficult  it  is  to  safeguard  yourself  against  their 
methods. 

"We  will  say  that  a  band  of  swindlers  desires  to  know 
what  amount  it  will  be  safe  to  use  in  tampering  with  the 
check  of  a  certain  concern,  what  number  to  use,  etc. 

"About  five  o'clock  in  the  afternoon  a  young  man  calls 
at  the  office  of  the  concern  arid  states  that  he  understands 
his  employers  have  had  complaints  from  the  head  of  this 
firm  about  the  paper  furnished  for  its  checks  fading  out  or 


120  THE   PRACTICAL  WORK  OF   A   BANK 

turning  color.  The  head  of  the  business  has  gone  home  and 
the  bookkeeper  suggests  to  this  young  man  that  he  call  the 
following  day. 

"The  young  man  then  asks  if  he  may  examine  some  of 
the  cancelled  checks  to  see  what  reason  there  may  be  for  the 
complaint.  He  asks  to  see  some  of  the  old  checks  and  also 
some  of  the  recent  ones,  for  purposes  of  comparison,  which 
seems  reasonable,  and  some  of  the  checks  are  produced  from 
the  vault. 

"By  a  little  sleight-of-hand,  which  is  part  of  his  business, 
the  rascal  manages  to  abstract  one  of  the  recent  checks,  and 
thus  goes  away  armed  with  all  the  working  material  and  in- 
formation that  he  needs.  He  may  utilize  the  old  cancelled 
check  by  filling  in  the  'Paid  Stamp'  perforations  and  chang- 
ing the  amounts,  dates,  etc.  At  any  rate,  he  has  possession 
of  a  genuine  check,  which  is  a  mighty  dangerous  instru- 
ment in  such  hands. 

SAMPLE  CHECKS  MUST  BE  SAFEGUARDED 

"In  one  case  the  swindlers  desired  to  use  the  sample 
check  merely  as  a  'model'  from  which  to  prepare  a  big 
forged  check,  and  they  managed  without  much  trouble  to 
get  possession  of  some  blank  check  forms  of  this  concern, 
on  which  they  did  a  very  neat  piece  of  work  and  secured 
about  $10,000  from  one  of  the  biggest  banks  in  New  York. 

"The  checks  being  printed  specially  with  the  name  of 
the  concern  in  peculiar  type,  and  on  a  special  tinted  paper 
manufactured  only  for  this  particular  bank,  in  connection 
with  other  circumstances  surrounding  the  case,  the  deduc- 
tion was  that  the  blank  check  must  have  come  from  the 
printer  who  made  the  checks  for  this  bank. 

"I  called  upon  the  printer,  and  he  told  me  that  it  was 
absolutely  impossible  for  any  person  to  secure  one  of  these 
checks.  I  asked  him  what  precaution  he  took  for  safeguard- 
ing the  checks.  He  went  to  a  drawer  and  brought  out  a 
large  book,  containing  samples  of  the  various  checks  he  had 
printed.  I  asked:  'Wouldn't  it  be  possible  to  get  some  of 
those?'  He  answerd:  'Oh,  no!'  I  then  told  him  my  pur- 
pose, that  I  was  there  as  a  representative  of  the  American 
Bankers  Association,  to  determine  how  the  forger  had  se- 
cured those  checks,  and  he  assured  me  it  was  absolutely  im- 


THE    PAYING    TELLER  121 

possible,  that  the  checks  in  question  must  have  been  stolen 
from  the  firm  or  counterfeited. 

"Then  I  asked:  'Would  it  be  possible  to  get  them  from 
the  pressman?'  "No,  because  we  count  out  the  sheets  given 
to  him,  and  he  accounts  for  them.'  So  I  asked:  'Would  it 
be  possible  to  get  them  from  the  bookbinder?'  'No,'  he  re- 
plied again,  'because  the  same  method  is  followed  with  the 
bookbinder.' 

"I  then  pulled  from  my  pocket  ten  of  these  checks,  and 
said:  'Where  do  you  suppose  I  got  these?' 

"He  looked  at  them  in  astonishment,  and  said:  'Why,  I 
don't  know.' 

"I  said,  'Why,  I  just  pulled  them  off  your  wall,  among 
six  or  seven  hundred  other  samples  hanging  there.  You  did 
not  see  me  get  them?' 

'Well,'  he  said,  'that  couldn't  happen  but  once.' 

"So  I  left  him  and  went  to  the  press  room,  and  there 
I  succeeded  in  finding  a  number  of  samples  of  checks,  but 
not  of  this  particular  sort.  I  next  called  at  the  bookbind- 
er's, and  there  obtained  twenty  of  the  same  identical  checks, 
thrown  to  one  side  by  the  binder.  I  carried  those  back  to 
the  printer,  and  I  said  to  him:  'What  is  the  use  of  a  bank 
taking  any  precaution  to  pay  for  security  in  printing  of  this 
character,  when  any  person  who  wants  to  do  so  can  get  the 
checks  at  will?  And  moreover,'  I  pursued,  'the  very  as- 
sumed security  of  this  work  you  are  doing  makes  it  all  the 
more  dangerous  to  your  customers;  because  these  checks 
are  supposed  to  be  safeguarded,  and  the  banks  generally  so 
regard  them,  and  when  they  get  in  circulation,  as  in  this 
case,  they  are  calculated  to  fool  not  only  the  banker,  but 
the  merchant,  anywhere,  because  it  is  supposed  to  be  im- 
possible for  outsiders  to  get  possession  of  such  checks.' 

How  BANKERS  CAN  PROTECT  THEIR  DEPOSITORS  AGAINST 

CHECK  FRAUDS 

"These  are  some  of  the  questions,  gentlemen,  that  the 
bankers  must  take  up  for  the  protection  of  the  world  of 
banking  and  business.  They  must  see  to  it,  first  of  all,  that 
the  printer  who  prints  their  checks  takes  greater  precau- 
tions toward  preserving  those  checks  from  crooks.  Then,  in 
the  next  place,  they  must  use  their  good  offices  with  deposi- 


122  THE   PRACTICAL  WORK   OF   A   BANK 

tors  to  see  that  they  are  careful  as  to  the  manner  in  which 
they  issue  their  checks. 

"I  do  not  mean  that  depositors  can  avoid  giving  checks 
to  strangers — because  the  strangers  will  find  a  thousand 
ways  of  getting  them,  anyway — but  they  can  write  them  in 
such  a  manner  that  they  will  not  be  a  positive  invitation  to 
crookedness,  as  so  many  checks  are  at  the  present  day." 

EDUCATING  THE  DEPOSITOR 

The  bank  owes  it  to  itself  to  educate  the  depositor  in 
the  proper  method  of  drawing  checks.  The  raising  of  a. 
check  by  a  clever  forger  is  easy.  It  can  be  made  difficult,  if 
not  quite  impossible,  by  these  precautions  which  every  bank 
should  bring  to  the  notice  of  its  depositors:  (1)  Use  safety 
paper,  good  ink  and  plenty  of  it.  This  reduces  the  chances 
considerably,  although  not  entirely;  (2)  write  the  figures 
well  up  against  the  dollar  sign;  make  the  figures  strong,  the 
"00/00"  in  such  a  way  as  to  leave  no  room  for  other  cy- 
phers; (3)  write  the  words  in  a  heavy  hand,  beginning  well 
to  the  left  and  filling  all  spaces  with  a  bold  wavy  line:  (4) 
use  the  best  protecting  device  that  can  be  found;  (5)  issue 
no  checks  to  strangers;  (6)  balance  the  book  with  the  check 
book  and  prove  the  indorsements  as  soon  as  vouchers  are 
returned.  By  promulgating  these  simple  rules,  much  loss 
and  annoyance  may  be  saved. 

It  is  a  rule  of  law  that  the  bank  pays  forgeries  at  its 
peril,  and  cannot  be  held  blameless  if  it  pays  forged  or  raised 
instruments;  but  many  checks  are  issued  in  such  open  defi- 
ance of  all  due  precaution  that  it  would  be  a  manifest  injus- 
tice to  the  bank  to  hold  it  liable  for  raised  checks  made  easy 
by  the  careless  drawing  on  the  part  of  the  depositor.  The 
author  has  found  no  adjudicated  case  where  the  loss  has 
been  placed  on  the  maker  by  a  court  of  high  standing;  but 
it  is  certain  that  if  the  depositor  follows  the  rules  above  laid 
down  he  could  not  be  held  liable;  while  on  the  other  hand, 
if  he  invites  loss  to  the  bank  it  would  be  unjust  to  hold  him 
harmless. 

DUTY  OF  DRAWER  TO  EXERCISE  CARE  IN  PREPARING  CHECK 

It  has  been  held  in  many  jurisdictions  that  where  the 
drawer  or  maker  of  a  bill  or  note  prepares  it  so  carelessly  that 
alteration  may  easily  be  made,  either  by  insertion  or  erasure, 


THE    PAYING    TELLER  128 

without  defacing  the  instrument  or  exciting  the  suspicion  of 
ti  careful  man,  and  the  opportunity  thus  afforded  is  embraced 
and  the  instrument  raised  in  amount,  the  maker  or  drawer 
will  be  liable  upon  it  as  raised  to  any  holder  in  due  course. 
This  holding  has  been  placed  on  several  different  grounds: 
first,  that  the  drawer  is  estopped  by  his  negligence;  second, 
that  where  one  of  two  innocent  persons  must  suffer  a  loss 
through  the  wrong  of  a  third  person  he  shall  sustain  the  loss 
who  put  it  in  the  power  of  the  third  person  to  commit  the 
wrong;  third,  that  it  is  the  duty  of  one  issuing  commercial 
paper  to  guard  not  only  himself  but  the  public  as  well,  by 
refusing  to  sign  an  instrument  in  such  form  as  to  permit  of 
alteration  with  ease  and  without  ready  detection ;  and,  fourth, 
that  the  free  interchange  of  commercial  paper  requires  such 
a  rule.  Other  authorities  refuse  to  hold  to  this  doctrine  upon 
any  ground,  claiming  that  the  person  who  issues  a  negotiable 
instrument  owes  no  duty  to  subsequent  purchasers  and  that 
he  is  entitled  to  rely  upon  the  presumption  that  it  will  not  be 
criminally  altered. 

But  whatever  may  be  the  just  rule  in  respect  to  promis- 
sory notes  and  ordinary  bills  of  exchange,  it  is  apparent  that 
there  is  a  ground  on  which  to  distinguish  checks,  for  the  rela- 
tion between  a  bank  and  its  depositor  is  essentially  different 
from  that  which  is  found  to  exist  between  the  parties  to  a 
promissory  note  or  ordinary  bill  of  exchange.  In  regard 
to  a  bill  or  note  no  one  is  bound,  in  the  absence  of  special 
agreement,  to  purchase  it  or  become  a  party  to  it  in  any  man- 
ner. But  a  bank  is  bound  to  honor  its  depositor's  checks  at 
its  peril.  Hence  it  is  a  just  rule  to  require  the  depositor  to 
exercise  reasonable  care  in  the  preparation  of  his  checks  to  the 
end  that  loss  may  not  be  thrown  unnecessarily  upon  the  bank. 
Trust  Co.  of  America  v.  Conklin,  65  Misc.  Rep.  1,  119  N.  Y. 
Supp.  367. 

In  an  early  English  decision  it  appeared  that  the  plaintiff, 
having  occasion  to  be  absent  from  home,  left  with  his  wife 
certain  checks  signed  by  him  in  blank,  to  be  filled  in  by  her 
and  used  as  business  might  require.  She  delivered  one  of 
these  checks  to  the  plaintiff's  clerk  to  be  filled  in  for  the  sum 
of  fifty  pounds.  The  clerk  wrote  the  word  fifty  in  the  middle 
of  the  blank  line  left  for  that  purpose  and  began  it  with  a 
small  letter.  He  showed  the  check  to  the  plaintiff's  wife, 
who  directed  him  to  draw  the  cash.  Before  doing  so  he 
raised  the  check  to  three  hundred  and  fifty  pounds,  the  altera- 


124  THE   PRACTICAL  WORK  OF   A   BANK 

tion  being  rendered  easy  of  accomplishment  by  the  manner  in 
which  the  check  was  prepared,  and  drew  the  larger  sum.  It 
was  held  in  this  case  that  the  plaintiff  could  not  recover  from 
his  banker  the  money  which  he  claimed  had  been  paid  out 
without  authority.  Young  v.  Grote  4  Bing  (Eng.)  253. 

This  case  was  followed  in  a  recent  New  York  decision,  in 
which  it  appeared  that  a  wife  signed  a  check  which  her  hus- 
band had  filled  out  for  the  sum  of  $900,  leaving  space  which 
enabled  him  to  raise  the  check  to  $4,900.  He  raised  the  check 
in  this  manner  and  withdrew  the  entire  amount.  In  an  action 
by  the  wife  against  the  drawee  bank  it  was  held  that  the  ques- 
tion whether  the  wife  was  so  negligent  as  to  preclude  her  from 
recovering  from  the  bank  was  a  matter  for  the  determination 
of  the  jury.  Timbel  v.  Garfield  Nat.  Bank,  121  N.  Y.  App. 
Div.  870, 106  N.  Y.  Supp.  497. 

In  the  opinion  it  was  said:  "The  text  books  are  quite 
unanimous  in  asserting  that,  where  a  drawer  of  a  check  has 
prepared  his  check  so  negligently  that  it  can  be  easily  altered, 
without  giving  the  instrument  a  suspicious  appearance  and 
alterations  are  afterwards  made,  he  can  blame  no  one  but  him- 
self, and  that  in  such  case  he  cannot  hold  the  bank  liable  for 
the  consequences  of  his  own  negligence  in  that  respect. 

If  a  check  appears  to  have  been  altered  the  banker  is  put 
on  inquiry  as  to  the  correctness  of  the  alteration  and  he  pays 
it  at  his  own  peril.  Where,  however,  the  alteration  is  such  as 
to  excite  no  suspicion  because  the  check  has  been  drawn  by  the 
maker  in  such  a  way  as  to  invite  an  unsuspicious  alteration, 
the  law  makes  an  exception  to  the  rule  that  a  banker  pays  at 
his  own  peril  and  permits  him  to  assert  negligence  on  the  part 
of  the  maker  in  so  drawing  his  check." 

Citing  5  Cyc.  544;  Daniels  on  Negotiable  Instruments, 
5th  Ed.,  Sec.  1659;  Morse  on  Banks  and  Banking,  4th  Ed., 
Sec.  480;  Zane  on  Banks  and  Banking,  Sec.  154;  Story  on 
Promissory  Notes,  7th  Ed.,  675. 

It  is  held,  however,  that  while  the  drawer  of  a  check  may 
not  recover  from  his  banker  where  he  draws  the  instrument  in 
such  an  incomplete  state  as  to  facilitate  or  invite  fraudulent 
alteration,  he  is  not  bound  so  to  prepare  the  check  that  nobody 
can  successfully  tamper  with  it.  (Critten  v.  Chemical  Nat. 
Bank,  171  N.  Y.  219.)  (Brady,  Law  of  Bank  Checks,  157.) 

The  following  citations  are  also  in  point: 


THE    PAYING    TELLER  125 

"If  by  any  act  or  negligence  on  the  part  of  the  drawer, 
as  by  so  carelessly  writing  the  check  as  to  render  it  easily 
open  to  material  alteration  without  leaving  evident  traces  of 
such  alteration,  the  customer  has  furnished  the  opportunity 
for  the  fraud  which  has  deceived  the  bank,  he  must  suffer 
the  just  consequences  of  his  carelessness  by  bearing  the  loss 
himself." — Morse  on  Banks  and  Banking,  Sec.  480;  and 
Young  vs.  Grote,  4  Bing.  253. 

"For  clearly  a  bank  has  a  right  to  demand  some  duties 
from  its  customers,  in  such  an  important  matter  as  protec- 
tion from  fraud,  in  a  business  where  frauds  of  a  particularly 
skillful  and  ingenious  nature  are  continually  in  course  of 
perpetration." — Morse  on  Banks,  235. 

"The  drawee  can  be  held  bound  only  to  know  the  signa- 
ture of  the  depositor,  and  not  the  handwriting  of  the  body 
of  the  check,  the  money  paid  in  good  faith  and  without  neg- 
ligence on  an  altered  check,  may  be  recovered  by  the  bank." 
—United  States— Espey  vs.  Cincinnati  Bank,  18  Wall 
(U.S.)  614. 

"The  maker  of  check  is  bound  to  use  recognized  safe- 
guards in  protecting  his  check  against  alteration,  where  an 
innocent  holder  may  sustain  loss." — Daniel  on  Negotiable 
Instruments. 

THE  BANK'S  PAYROIJL. 

The  payroll  is  often  made  up  by  the  paying  teller,  or  by 
an  officer.  This  is  usually  done  so  that  the  employees  will 
not  know  what  each  other  receives.  There  are  two  sides  to 
this  question.  It  may  spur  a  man  on  to  know  what  the  man 
ahead  of  him  earns,  or  it  may  lead  to  jealousies  as  to  the 
other's  worth.  Some  banks  have  a  payroll  so  that  all  sala- 
ries are  receipted  for  by  the  men,  each  knowing  what  the 
other  receives ;  while  others  have  a  payroll  book,  in  which  the 
clerk  simply  signs  for  the  salary  for  the  period  and  no 
amount  named,  the  amount  being  covered  by  a  receipt  which 
is  enclosed  in  an  envelope  with  no  other  marking  than  his 
name,  so  that  he  alone  knows  the  amount.  On  pay  day  the 
envelopes  are  passed  around,  generally  with  new  money,  the 
receipts  enclosed  therein,  to  be  signed  and  dropped  in  a  box, 
and  checked  against  the  payroll  in  the  book. 

One  of  the  duties  that  falls  to  the  lot  of  the  paying  teller 
is  to  furnish  money  for  payroll  purposes  for  customers ;  and 
in  large  establishments  this  is  a  big  item,  and  one  of  the 


126  THE   PRACTICAL  WORK   OF   A   BANK 

principal  avenues  for  the  utilization  of  the  bank's  cash.  As 
an  act  of  courtesy  to  the  teller,  payroll  money  should  be 
asked  for  as  early  as  possible,  so  as  to  give  him  time  to  put 
it  up  without  undue  haste,  and  also  not  to  keep  a  line  wait- 
ing. If  if  can  be  furnished  early  in  the  morning,  or  a  day 
before,  so  much  the  better.  The  requisition  for  payroll 
money  is  usually  made  on  forms  provided  for  that  purpose 
indicating  just  the  various  denominations  required.  Some 
banks  in  an  effort  to  get  business  have  agreed  to  put  up  the 
payroll  at  the  bank,  and  this  is  a  heavy  task  to  place  upon 
the  paying  teller,  as  it  involves  much  labor. 

THE  TELLER'S  MISTAKES 

The  paying  teller  should  have  all  due  protection  from 
outside  interference,  so  that  any  shortages  will  be  directly 
traceable  to  him  and  nowhere  else.  He  should  be  caged,  and 
the  cage  locked  against  all  comers.  In  case  of  shortages, 
where  more  than  one  or  possibly  two  have  access  to  the 
funds,  the  question  arises  as  to  who  is  responsible,  and  if 
clerks  are  allowed  to  enter  the  cage,  abstractions  might  take 
place,  and  while  small  to  the  teller  or  to  the  bank,  would 
look  large  to  the  pilferer,  and  might  be  large  in  their  conse- 
quences. 

Where  the  receiving  and  paying  is  done  at  the  same  win- 
dow, notes  arid  drafts  collected,  change  made,  and  all  sorts 
of  transactions  put  through,  there  is  more  liability  for  error 
than  where  the  work  is  specialized,  and  only  one  class  of 
transactions  handled. 

But  whatever  the  cause,  the  error  should  be  reported.  It 
is  but  fair  that  it  be  so ;  for  if  it  be  covered  up  it  will  surely 
lead  to  trouble,  and  any  bank  officer  who  is  fair-minded,  ex- 
perienced, and  fit  to  hold  his  position,  will  understand  that 
such  things  are  liable  to  happen. 

An  error  against  the  bank  is,  as  has  been  well  said, 
"a  fight  with  conscience";  while  if  it  is  against  the  de- 
positor he  will  hastily  report  it.  An  "over,"  if  a  short  pay- 
ment (to  be  paradoxical),  will  quickly  rectify  itself.  But 
cohsidering  the  amount  of  money  handled,  and  the  time  in 
which  it  is  handled,  the  wonder  is  that  so  few  mistakes  are 
made. 

Herein  the  savings  bank  teller  has  the  advantage.  He 
has  the  signature  of  all  his  depositors.  He  has  their  pedi- 


THE    PAYING    TELLER  127 

gree.  He  does  not  have  to  take  chances — he  can  use  his 
machinery.  He  can  be  reasonably  certain  of  his  payments. 
He  can  use  due  care  always. 

Some  banks  require  tellers  to  make  good  their  "shorts," 
but  do  not  permit  them  to  retain  the  "overs" — a  poor  prac- 
tice. The  principle  is  wrong,  and  all  discrepancies  should, 
after  due  search,  be  carried  to  "overs  and  shorts,"  until  such 
time  as  the  balance  may  be  charged  to  profit  and  loss  as  in- 
cidental to  the  business.  The  moral  punishment  is  sufficient, 
and  no  teller  is  knowingly  careless. 

THE  PAYING  TELLER'S  RECORDS  AND  FILES 

The  items  received  by  the  paying  teller  are  usually  all 
debits,  for  he  pays  out.  The  checks  drawn  on  his  own  bank 
are  charged  to  the  bookkeeping  department;  other  checks 
are  charged  to  the  transit  department.  If  the  teller  makes 
the  clearing-house  settlements,  these  checks  will  be  held  for 
the  morning  clearing.  Having  the  cash  balance  of  the  day 
before,  he  charges  himself  with  all  receipts  from  the  receiv- 
ing teller,  and  credits  himself  with  all  payments,  the  balance 
being  the  net  cash  on  hand.  If  he  receives  from  or  pays  to 
the  clearing-house,  he  debits  or  credits  himself  accordingly. 

The  bookkeeping  in  the  paying  teller's  cage  is  very 
simple.  He  has  a  cash  book  or  blotter  in  which  are  recorded 
all  items  passing  through  his  cage.  This  book  is  arranged 
in  columnar  form,  with  a  debit  column  for  each  teller  and 
bookkeeper  to  whom  he  may  have  occasion  to  charge  items, 
and  a  credit  column  for  those  from  whom  he  may  receive 
them.  The  adding  machine  can  be  used  for  listing  and  the 
slips  pasted  in  their  respective  places.  This  will  frequently 
save  considerable  time.  The  totals  of  the  several  credit  col- 
umns show  the  cash,  checks  and  credits  to  general  accounts 
received  from  the  receiving  teller,  note  teller,  and  so  forth, 
and  the  exchanges  from  the  clearing-house.  These  are  added 
to  the  previous  day's  balance.  From  this  amount  is  taken 
the  total  of  the  various  debit  columns,  which  represent 
checks  charged  to  the  individual  bookkeepers,  and  checks  on 
other  banks  charged  to  the  receiving  teller  or  clearing-house 
or  transit  department,  and  charges  against  accounts  on  the 
general  ledger. 

The  balance  should  agree  with  the  teller's  cash  and  cash 


128  THE   PRACTICAL  WORK  OF   A   BANK 

items.  If  correct  it  is  entered  in  the  teller's  daily  cash  sheet, 
and  with  the  balances  of  the  other  tellers,  makes  up  the  cash 
balance  for  the  day.  This  total  will  balance  with  the  gen- 
eral cash  book  of  the  bank. 

The  paying  teller's  department  has  in  its  custody  the  files 
containing  the  signatures  of  customers  and  those  authorized 
to  sign  on  behalf  of  persons,  co-partnerships  and  corpora- 
tions having  accounts  with  the  bank.  These  are  filed  in  an 
orderly  and  readily  accessible  manner.  The  certification 
register,  the  teller's  check  list  and  the  teller's  proof  book 
complete  his  books  of  entry  or  record. 

Signatures  may  be  as  follows: 

Individual. 

Joint — one  or  more  persons  interested  in  the  same 
account. 

Co-partnership — signatures  of  either  one  or  more  part- 
ners binding  a  firm. 

Corporation — by  officers — authorization  showing  officers 
empowered  to  sign  on  behalf  of  corporations  as  shown  by  ex- 
cerpt from  by-laws  or  resolutions  passed  at  meetings  of  di- 
rectors, and  a  copy  of  the  minutes  of  the  meeting  at  which 
these  officers  authorized  to  sign  on  behalf  of  the  corporation 
were  elected  This  extract  or  copy  being  signed  by  the  sec- 
retary of  the  meeting  and  impressed  with  the  seal  of  the 
corporation,  is  kept  in  files  at  the  bank  where  it  may  be 
readily  referred  to. 

Banks'  signature  cards  showing  specimens  of  signatures 
of  those  authorized  to  sign  on  behalf  of  such  banks  should 
be  certified  to  over  the  signature  of  the  cashier  and  kept  in 
signature  card  files. 

Power  of  Attorney — Signature  by  attorney  is  a  signa- 
ture of  a  person  or  persons  appointed  to  sign  in  the  name  of 
another  person,  company  or  officer  of  a  corporation,  and 
these  powers  should  also  be  kept  in  files  where  they  are  read- 
ily accessible.  Some  are  executed  to  give  a  limited  authority, 
and  others  are  sufficiently  general  in  their  scope  to  permit 
the  attorney  to  do  all  of  the  things  in  connection  with  the 
Bank  account  that  the  principal  may  be  permitted  to  do. 

Agent,  Manager,  Special,  Etc. — When  signing  in  this 
manner  the  principal  need  not  necessarily  be  revealed. 

Administrator,  Executor,  Trustee — Must  be  accompa- 
nied by  a  proper  authorization,  and  these  very  titles  are  suf- 


THE    PAYING    TELLER  129 

ficient  in  themselves  to  put  the  banker  upon  notice  that 
proper  authorization  is  required. 

The  Certification  Register — The  teller's  check  list,  and 
the  teller's  proof  book  admit  of  a  range  from  which  a  selec- 
tion may  be  made  from  a  number  of  good  forms  to  suit  the 
requirements  and  needs  of  each  bank  according  to  the  size 
of  the  bank,  the  arrangement  of  the  department  or  the  size 
of  the  community  in  which  the  bank  is  located.4 

WHAT  I  Do  BY  ANOTHER  I  Do  BY  MYSELF 

What  a  man  may  do  by  himself  he  may  do  by  his  agent; 
and  the  acts  of  the  agent  within  the  scope  of  his  authority 
are  the  acts  of  the  principal ;  therefore,  a  depositor  in  a  bank 
may  delegate  his  right  to  draw  upon  the  bank  by  proper 
authority,  which  is  most  frequently  by  power  of  attorney. 
This  may  be  limited  or  unlimited,  and  includes,  as  a  rule, 
the  right  to  indorse.  The  right  to  indorse  only  may  be 
given,  but  the  right  to  indorse  does  not  include  the  right  to 
draw  checks.  The  power  must  be  in  writing,  explicit,  and 
cover  the  ground  fully,  so  that  the  bank  will  know  that  the 
agent  or  attorney  has  exact  powers  and  what  they  are. 
Such  signatures  should  always  be  in  the  form:  "A,  by  B,  at- 
torney," and  not  simply  "B,  attorney,  agent,  etc."  A  knowl- 
edge of  the  law  of  agency  is  here  applicable  and  the  teller 
should  know  how  far  the  principal  is  liable  and  how  far  the 
agent,  and  see  that  in  the  acts  authorized  the  agent  binds 
the  principal  and  not  himself.  Sometimes  he  binds  neither. 

The  death  of  the  drawer  of  a  check  revokes  his  order  and 
the  teller  is  charged  with  notice  not  to  pay  as  soon  as  knowl- 
edge of  the  maker's  death  is  received. 

THE  MONEY  TELLER 

Having  considered  the  paying  teller's  department  from 
the  standpoint  of  the  average  teller  in  the  average  bank,  let 
us  look  at  another  phase  of  the  subject,  that  of  the  paying 
teller  in  the  large  bank,  say,  with  deposits  of  $60,000,000  to 
$100,000,000  or  more. 

In  a  bank  of  this  size  the  first  paying  teller  needs  to  give 

*Henry  Billman,  Cashier  North  Side  Bank  of  Brooklyn,  before  New  York 
Chapter. 


180  THE   PRACTICAL  WORK  OF   A  BANK 

all  his  time  to  the  care  and  distribution  of  the  bank's  cash, 
leaving  to  the  other  tellers  the  paying  of  checks,  waiting 
upon  depositors  and  all  other  details  of  the  department. 

He  will  have  under  his  charge  a  cash  balance  varying 
from  $5,000,000  to  $15,000,000  of  actual  money.  The  larger 
the  institution  the  greater  will  be  the  fluctuations  in  the 
bank's  holdings  of  cash.  This  money  comes  into  the  bank 
from  two  sources,  the  greater  part  of  the  bills  of  the  smaller 
denominations  being  deposited  with  the  receiving  tellers, 
while  those  of  large  denominations  come  from  clearing-house 
balances  and  the  Sub-Treasury.  The  small  bills  are  depos- 
ited in  sums  varying  from  a  few  dollars  from  individual  de- 
positors up  to  great  bundles  brought  in  by  large  corpora- 
tions, railroads  and  from  correspondent  banks.  The  loose 
bills  are  verified  by  the  receiving  tellers  and  sorted  into  the 
tills  to  be  made  up  into  packages  as  soon  as  time  permits. 

It  is  customary  for  banks  to  furnish  their  depositors 
with  bill  straps,  with  printed  spaces  for  the  amount,  the  de- 
positor's name  and  date  of  deposit.  During  the  day  these 
bills  are  sent  to  the  bill  teller's  department  in  their  original 
wrappers.  In  a  large  bank  it  is  not  an  uncommon  occur- 
rence to  receive  as  large  a  sum  as  $700,000  in  a  day,  and  the 
bill  teller's  department  in  such  a  bank  is  a  busy  one. 

In  this  department  there  may  be  fifteen  to  twenty  bill 
counters,  whose  duty  it  is  to  verify  all  these  various  pack- 
ages of  currency,  to  cull  out  the  unfit  bills,  and  to  sort  and 
arrange  the  good  bills  in  form  suitable  for  use  at  the  pay- 
ing teller's  windows  and  for  shipment  to  correspondent 
banks.  An  average  of  from  thirty  to  forty  per  cent,  of  cur- 
rency so  deposited  is  unfit  for  circulation. 

These  bills  are  counted  so  that  ones  and  twos  are  in  $100 
straps;  fives  in  $500  straps;  tens  in  $1,000  straps,  and  twen- 
ties in  $2,000  straps,  the  straps  being  of  different  colors  that 
they  may  be  readily  distinguished.  At  the  close  of  the  day 
the  even  packages  are  sent  to  the  paying  teller,  the  odd 
amounts  and  unverified  packages  remaining  with  the  bill 
teller,  who  keeps  a  debit  and  credit  account  with  the  paying 
and  receiving  tellers. 

With  this  amount  of  cash  it  is  extremely  important  that 
it  shall  be  stored  in  the  vault  in  such  shape  that  it  may  be 
readily  verified.  Uniform  sized  bundles  of  the  different  de- 
nominations may  be  made  up  containing  twenty  packages 


THE    PAYING    TELLER  181 

each  of  the  various  denominations,  so  that  each  bundle  of 
ones  and  twos  would  contain  $2,000,  the  fives  would  be  in  a 
$10,000  bundle  and  the  tens  in  a  $20,000  bundle,  the  differ- 
ent colored  straps  instantly  indicating  the  denomination. 
Then  each  denomination  being  stored  by  itself  it  is  a  mat- 
ter of  a  very  short  time  to  verify  a  large  balance  of  cash. 

For  the  purpose  of  having  an  accurate  record  of  this 
cash  a  vault  book  is  kept  showing  the  actual  amount  of  each 
denomination.  The  daily  changes  are  recorded  by  a  debit 
and  credit  account  in  the  vault  book,  charging  the  vault  with 
such  amounts  as  are  put  in,  and  crediting  it  with  amounts 
withdrawn,  striking  a  balance  at  the  close  of  the  day;  then, 
as  the  vault  total  is  entered  as  one  item  on  the  teller's  settle- 
ment, any  error  or  omission  is  bound  to  show  in  the  settle- 
ment. 

The  bills  of  the  larger  denominations,  excepting  national 
bank  notes,  form  the  greater  part  of  the  bank's  reserve 
against  deposit  liability,  and  are  practically  all  gold  cer- 
tificates, fifties,  one  hundreds,  five  hundreds,  one  thousands, 
five  thousands  and  ten  thousands.  The  fifties  and  one  hun- 
dreds are  usually  counted  into  packages  of  $5,000  each,  and 
the  larger  denominations  into  such  sized  packages  as  is  most 
convenient  to  the  teller,  an  accurate  record  of  which  is  also 
kept  in  the  vault  book. 

A  few  of  the  largest  banks,  by  an  arrangement  with  the 
Treasury  Department,  and  a  large  number  of  country  banks, 
receive  directly  from  Washington  all  the  new  currency  is- 
sued to  those  banks  to  replace  their  unfit  bills  which  have 
been  destroyed.  This  amounts  to  a  very  large  sum  in  the 
course  of  a  year,  and  adds  very  materially  to  the  large 
bank's  supply  of  new  bills. 

The  large  bank  maintains  a  completely  equipped  print- 
ing office  which  prints  upon  the  bills  the  signatures  of  the 
respective  officers  and  cuts  and  trims  the  sheets  of  bills.  Re- 
cently in  one  of  our  largest  banks  20,000  bills  were  pre- 
pared for  circulation  in  less  than  two  days. 

A  surprisingly  large  amount  of  fractional  currency  is 
used  daily  in  a  large  bank,  it  not  being  an  uncommon  oc- 
currence to  pay  out  $50,000  in  a  day.  This  fractional  cur- 
rency is  rolled  and  packed  in  heavy,  flat,  tin  trays  holding 
one  layer  of  coin,  and  is  stacked  up  in  the  vault,  each  de- 


132  THE   PRACTICAL  WORK  OF   A   BANK 

nomination  by  itself,  in  the  same  manner  as  the  bills,  and  a 
similar  record  kept  in  the  vault  book. 

Financial  affairs  are  so  susceptible  to  conditions  the 
worlbl  over  that  while  to-day  the  banks  may  have  a  surplus 
supply  of  cash  some  untoward  happening  might  start  to- 
morrow a  demand  which  would  exhaust  the  supply  of  every 
bank  in  a  fortnight.  Such  was  the  situation  in  1907  when 
bills  sold  at  a  premium  of  four  dollars  per  thousand. 

The  value  of  a  large  bank  was  well  demonstrated  at  that 
time,  for  during  the  three  months  of  the  currency  stringency 
one  of  our  largest  banks  collected  $13,000,000  in  small  bills, 
and  besides  taking  care  of  their  own  depositors  distributed 
them  from  Maine  to  California  where  they  were  the  most 
needed,  and  that  without  paying  or  charging  a  cent  of 
premium. 

During  certain  seasons  of  the  year  currency  flows  into 
the  city  banks  in  large  volume,  and  then  at  other  seasons 
the  tide  turns  and  the  flow  is  all  outward.  It  is  the  duty  of 
the  paying  teller  to  anticipate  these  seasonable  movements 
of  money  and  to  accumulate  or  distribute  his  cash  as  the 
case  may  require.  It  is  much  easier  to  relieve  a  surplus  than 
a  shortage. 

Every  department  of  a  large  bank  is  an  almost  inde- 
pendent organization.  The  executive  officers,  being  occu- 
pied with  their  own  duties,  must  depend  upon  the  heads  of 
these  departments  for  details;  so  it  is  necessary  that  the 
paying  teller's  records  shall  enable  him  to  answer  promptly 
and  accurately  any  question  concerning  the  bank's  cash. 

The  daily  routine  of  the  first  paying  teller  may  follow 
somewhat  upon  these  lines :  Long  before  the  bank  opens  for 
business  he  has  received  and  filled  the  requisitions  for  bills 
and  coin  from  the  other  paying  tellers,  perhaps  from  $200,- 
000  to  $400,000  each,  according  to  the  day  of  tlie  week  or 
season  of  the  year.  Then  the  requests  from  correspondent 
banks  are  made  up  and  sent  to  the  express  companies.  In  a 
year  of  good  business  the  banks  in  manufacturing  centers 
make  heavy  demands  for  currency  for  payrolls.  Between 
nine  and  ten  o'clock  the  brokers'  clerks  bring  in  their  checks 
for  certification,  and  in  an  active  stock  market  these  cer- 
tifications will  run  into  the  hundreds  daily.  At  ten  o'clock 


THE    PAYING    TELLER  183 

the  Sub-Treasury  opens  for  business,  and  large  deposits 
are  made  daily,  on  account  of  the  five  per  cent,  funds  of 
correspondent  banks,  for  shipments  of  silver,  transfer  of 
funds,  etc.;  and  so  through  the  day  constant  demands  are 
made  upon  the  paying  teller  until  the  closing  hour,  and 
then  if  remittances  are  very  large  and  New  York  funds  are 
scarce  and  at  a  premium  he  may  have  to  ship  $1,000,000  in 
small  bills  to  a  dozen  New  York  correspondents. 

The  duty  of  caring  for  such  large  sums  of  cash  and  of 
anticipating  the  needs  of  the  future  call  for  good  judgment, 
ability,  experience,  energy  and  integrity.5 


FIGURING  THE  RESERVE 

One  of  the  features  that  distinguishes  European  from 
American  banking  methods  is  the  reserve.  In  Europe  the 
reserve  is  optional,  while  in  this  country  it  is  obligatory.  In 
European  countries  no  reserve  is  stipulated  by  law,  the 
banks  being  left  to  themselves  in  this  matter,  to  carry  as 
much  or  as  little  as  the  occasion  requires.  The  Bank  of 
England  has  had  as  low  as  fourteen  per  cent,  and  as  high 
as  fifty-seven.  The  Bank  of  France  sometimes  has  as  high 
as  seventy-five  per  cent.,  but  in  the  United  States  the  re- 
serve requirements  have  never  been  over  twenty-five  per 
cent,  for  reserve  and  central  reserve  cities  and  less  in  other 
places,  although  banks  have  carried  as  high  as  fifty  per  cent, 
at  times. 

There  is  no  uniformity  in  this  country  except  under  the 
Federal  Reserve  Act,  which  specifies  the  reserve  that  must 
be  carried  by  all  member  banks.  State  banks  and  trust 
companies  which  are  not  members  are  subject  to  State  laws 
and  in  these  there  is  no  uniformity.  The  reserve,  however, 
is  always  larger  in  the  large  cities  than  in  country  districts, 
and  the  reserve  on  time  deposits  smaller  than  on  demand 
deposits. 

The  lawful  reserve  of  a  bank  consists  of  its  balances  with 
reserve  agents  and  its  money  holdings  of  such  character  as 
the  law  stipulates  shall  constitute  reserves. 

BFrom  an  address  delivered  by  E.  W.  Jones,  paying  teller  of  National 
Shawmut  Bank  before  Boston  Chapter,  A.  I.  B.,  Nov.  19,  1912. 


184  THE    PRACTICAL  WORK   OF   A   BANK 

The  method  of  computing  the  reserve  to  be  carried  with 
Federal  Reserve  Bank  by  all  member  banks  not  located  in 
reserve  or  central  reserve  cities  is  as  follows: 


DEMAND  DEPOSITS. 

1  Deposits,  other  than  United  States  Government 

deposits,  payable  within  thirty  days 

2  Balances  due  to  banks,  other  than  Federal  Re- 

serve Banks   

LESS  : 

3  Balances  due  from  banks,  other  than  Federal  Re- 

serve Banks   .  $ 


4  Checks  on  other  banks  in  the  same  place ! 

5  Exchanges  for  clearing  house ! 

Total  Deductions  (Items  3,  4  and  5) 

6  Net  balance  due  to  banks0 

7  TOTAL  DEMAND  DEPOSITS  (Items  1  and  6) 


TIME  DEPOSITS. 

8  Savings  accounts  (subject  to  not  less  than  thirty 

days'  notice  before  payment) 

9  Certificates  of  deposit  (subject  to  not  less  than 

thirty  days'  notice  before  payment) 

10  Other  deposits  payable  only  after  thirty  days.. 

11  Postal  Savings  deposits 

12  TOTAL  TIME  DEPOSITS  (Items  8,  9,  10  and  11).. 


Seven  per  cent,  of  Demand  deposits  (Item  7) ... 

Three  per  cent,  of  Time  deposits  (Item  12) 

Total  reserve  to  be  maintained  with  Federal 

Reserve  Bank  

Balance  on  deposit  with  Federal  Reserve  Bank. 

Excess    

Deficiency   


«Should  the  aggregate  "due  from  banks"  (Items  3,  4  and  5)  exceed  the  ag- 
gregate "due  to  banks,"  both  items  must  be  omitted  from  the  calculation. 


THE    PAYING    TELLER  185 

PRESENT  RESERVE  REQUIREMENTS  FOR  NATIONAL  BANKS. 

The  amendments  to  the  Federal  Reserve  Act,  approved 
June  21,  1917,  require  all  National  Banks  to  keep  their  re- 
serves only  in  the  Federal  Reserve  Banks  of  their  districts,  as 
follows7:  * 

COUNTRY  BANKS. 

Seven  per  cent,  on  Demand  Deposits. 
Three  per  cent,  on  Time  Deposits. 

RESERVE  CITY  BANKS. 

Ten  per  cent,  on  Demand  Deposits. 
Three  per  cent.  on. Time  Deposits. 

CENTRAL  RESERVE  CITY  BANKS. 

Thirteen  per  cent,  on  Demand  Deposits. 
Three  per  cent,  on  Time  Deposits. 

"Demand  deposits"  within  the  meaning  of  the  Act  comprise  ALL 
DEPOSITS  PAYABLE  WITHIN  THIRTY  DAYS. 

"Time  deposits"  comprise  all  deposits  which  CANNOT  BE  WITH- 
DRAWN within  thirty  days;  all  "savings  accounts"  and  "certificates  of 
deposit"  which  are  SUBJECT  to  not  less  than  THIRTY  DAYS'  NO- 
TICE, before  payment,  and  all  POSTAL  SAVINGS  DEPOSITS. 

Government  deposits,  other  than  Postal  Savings  deposits,  are  not  sub- 
ject to  reserve  requirements,  having  been  exempted  by  the  provisions  of 
Section  7  of  the  Act  of  April  24,  1917. 

By  a  ruling  of  the  Comptroller  of  the  Currency  as  of  July 
19,  1917,  National  Banks  are  no  longer  required  to  segregate 
their  money  holdings  as  heretofore,  into  various  classes,  and 
will  hereafter  report  their  cash  under  the  following  heads : 

Gold  Coin. 

Silver  and  Minor  Coins. 

Clearing  House  Certificates  based  on  specie  and  currency 
(Section  5192,  U.  S.  R.  S.). 

Paper  Currency. 

Under  the  latter  head  banks  will  include  all  Gold  Certifi- 
cates, Silver  Certificates,  National  Bank  Notes,  Treasury 
Notes,  United  States  Notes,  Federal  Reserve  Notes,  and 
Federal  Reserve  Bank  Notes. 

This  ruling  will  materially  reduce  the  labor  of  tellers  in 
national  banks. 


?It  will  thus  be  seen  that  National  Banks  are  required  to  keep  but  ONE  re- 
serve fund,  namely,  that  in  the  Federal  Reserve  Bank,  the  cash  in  vault  and  with 
correspondent  banks  being  optional. 


136  THE    PRACTICAL  WORK   OF   A   BANK 


Banking  principles  are  the  same,  whether  it  be  in  a  fifty- 
million-dollar  bank  or  in  a  modest  hundred-thousand-dollar 
institution  in  some  small  hamlet  where  the  cashier  is  the 
whole  bank,  knows  everybody  and  everybody's  business, 
whose  credit  department  is  "under  his  hat"  and  whose  identi- 
fication book  is  his  knowledge  of  the  people  of  the  town. 
He  may  open  the  bank,  build  the  fire,  get  the  mail,  answer 
letters,  attend  at  the  window  and  the  board  meetings,  and 
be  the  whole  bank  in  himself;  and  the  modern  bank,  with  its 
vast  and  seemingly  complex  organization,  is  but  the  evolu- 
tion of  this  one-man  institution. 

No  matter  how  large  or  how  small  a  bank  may  be,  the 
work  divides  itself  into  three  departments,  the  executive,  the 
teller's  and  the  accounting.  And  every  detail  of  the  work 
must  come  under  one  of  these  classifications.  If  a  letter 
comes  in  with  collection  items,  it  is  the  teller's  work  to  prove 
the  listing,  and  the  accounting  department's  function  to 
record  and  acknowledge.  It  may  not  be  the  money  teller  or 
a  designated  mail  teller,  but  it  is  teller's  work,  nevertheless. 
If  new  men  are  to  be  employed,  it  is  executive  work.  If  a 
letter  of  inquiry  comes  in,  it  may  be  part  of  the  accounting 
function  to  get  the  facts  for  the  executive's  information. 
These  functions  lock  and  interlock,  so  that  it  may  seem  com- 
plex in  a  large  bank,  and  exceedingly  simple  in  a  small  one ; 
but  the  only  difference  is  in  the  degree  and  not  in  the  kind 
of  work  involved.  One  man  may  perform  all  three  func- 
tions, or  only  one;  but  the  same  work  must  be  done  in  every 
bank  whether  it  handles  millions  or  only  thousands. 

These  functions,  of  course,  are  closely  allied,  the  one  be- 
ing dependent  upon  the  other.  The  work  may  be  highly  de- 
partmentized  as  in  large  city  banks,  or  done  by  one  man 
who  is  executive,  teller  and  clerk.  But  by  reason  of  the  in- 
dependence, to  a  certain  extent  of  each  department,  it  may 
be  segregated  and  perform  most  of  its  functions  alone,  being 
united  to  the  others  through  the  executive  and  supervising 
departments.  And  as  one  department  may  be  separated 
so  two  may  be,  and  the  unit  system  contemplates  taking  the 
teller's  and  the  bookkeeper's  work  and  uniting  them  into  a 
little  bank,  completely  equipped  to  handle  the  depositor's 
business  in  all  things  except  the  granting  of  loans. 

As  the  business  of  banking  grew  in  popularity  and  vol- 


THE    PAYING    TELLER  187 

ume,  new  ways  and  methods  were  devised  to  meet  the  in- 
creasing demands,  first,  by  adding  more  men  to  the  force, 
and  then  by  departmentizing  the  work,  so  that  each  man 
had  his  special  work  to  do,  and  all  dovetailed  together.  In- 
timacy could  no  longer  be  the  rule  and  machinery  had  to 
take  the  place  of  personality,  and  the  personal  equation  no 
longer  obtained.  The  most  logical  development  was  to  di- 
vide the  work  of  the  tellers  and  bookkeepers  into  sections, 
preferably  by  alphabetical  arrangement.  By  this  method 
the  tellers  became  acquainted  only  with  depositors  in  their 
section.  For  instance,  the  tellers  in  the  A,  B  and  C  window 
never  met  the  depositors  in  F,  G  and  H.  There  was  thus 
lost  that  personal  contact  with  all  depositors  that  is  so  de- 
sirable in  banking.  As  a  solution  of  the  difficulty,  and  to 
expedite  the  work,  we  have  the  unit  system,  by  which  the 
work  of  paying  and  receiving  is  done  at  the  same  window. 
The  author  found  this  system  in  use  in  Canada  a  few  years 
ago,  but  the  credit  for  introducing  it  in  this  country  be- 
longs to  Mr.  Stoddard  Jess,  vice-president  of  the  First 
National  Bank  of  Los  Angeles.  The  depositors  are  classi- 
fied according  to  alphabet,  and  the  work  of  receiving,  pay- 
ing and  bookkeeping  for  each  group  is  done  as  a  unit.  The 
window  work  is  performed  by  as  many  tellers  as  necessary, 
and  in  close  proximity  are  the  bookkeepers  and  statement 
clerks,  so  that  the  whole  work  of  caring  for  the  current 
needs  of  a  group  of  depositors  is  performed  in  a  limited  area 
and  each  is  complete  in  itself. 

Numerous  banks  throughout  the  country  have  used  this 
system  with  satisfaction,  particularly  the  Irving  National 
Bank  of  New  York,  the  First  National  Bank  of  Denver, 
Colorado,  and  others.  It  is  especially  adapted  to  banks  hav- 
ing a  large  counter  trade,  but  does  not  work  so  well  where 
the  bulk  of  the  transactions  are  through  the  clearing-house 
or  by  mail.  Moreover,  the  equipment  must  be  arranged  for 
such  work,  and  in  building  new  buildings  this  system  is  often 
introduced. 

In  such  a  system  there  must  be  a  controlling  account  to 
assemble  and  prove  the  figures  of  all  the  units,  the  latter 
turning  over  to  this  head  unit,  or  chief  bookkeeper,  all  ex- 
cess cash,  and  obtaining  from  him  all  supplies  of  money. 
Both  deposits  and  withdrawals  being  handled  at  the  same 
window,  there  is  a  movement  of  money  both  ways,  so  that 


188  THE    PRACTICAL  WORK  OF   A   BANK 

only  net  cash  is  dealt  with.  There  is,  of  course,  liability  of 
confusion  due  to  handling  two  kinds  of  work,  which  did  not 
obtain  under  the  old  system  of  segregating  the  work  into 
receiving  and  paying  departments. 

In  a  Chicago  bank  the  accounts  are  divided  into  groups, 
but  the  receiving  and  paying  is  done  by  different  men.  In 
this  bank  each  unit  is  complete  in  itself,  inasmuch  as  the 
customer  can  make  deposits,  cash  checks,  and  obtain  certifi- 
cations, statements,  vouchers  and  stationery  at  the  same 
window. 

The  unit  tellers'  system  was  devised  by  the  First  Na- 
tional Bank  of  Los  Angeles,  CaL,  to  meet  the  growing 
needs  of  the  bank  due  to  the  increasing  business  with  de- 
positors, which  was  caused  by  the  growth  of  the  bank  in 
popularity,  and  by  taking  over  other  institutions.  The  prob- 
lem was  to  take  care  of  about  15,000  open  accounts,  requir- 
ing forty  individual  ledgers.  The  result  was  the  bank  was 
divided  up  into  several  little  banks,  as  a  department  store  is 
composed  of  several  smaller  stores,  each  complete  up  to  a 
certain  point,  and  this  is  the  key  to  the  unit  system.  Mr. 
Stoddard  Jess,  who  devised  the  system  tells  how  he  intro- 
duced the  idea  in  the  bank,  from  which  it  has  spread  to  sev- 
eral other  banks  with  like  problems.  Writing  in  "The 
Bankers  Magazine,"  he  said: 

"In  the  spring  of  1905  the  First  National  Bank  of  Los 
Angeles  had  about  eight  thousand  accounts  with  individual 
depositors  on  its  books,  the  business  being  handled  by  three 
receiving  and  two  paying  tellers  in  rather  an  unsatisfactory 
manner,  for  the  reason  that  notwithstanding  the  fact  that 
the  work  was  divided  alphabetically  among  the  tellers,  still 
the  number  of  depositors  presenting  themselves  at  each  pay- 
ing teller's  window  was  about  four  thousand — too  large  a 
number  for  the  tellers  to  know  personally.  Another  diffi- 
culty seemed  to  be  that  at  certain  hours  of  the  day  the  pay- 
ing tellers  were  kept  very  busy  while  the  receiving  tellers 
had  but  little  to  do;  again,  at  other  times  and  particularly 
just  before  the  closing  hour,  long  lines  would  form  before 
the  receiving  tellers'  windows,  and  business  in  the  paying 
tellers'  cages  would  be  slack.  Just  at  this  time,  and  with 
these  conditions  existing,  it  was  decreed  that  the  First  Na- 
tional Bank  should  take  over  the  business  of  two  other  na- 
tional banks  in  the  city,  with  nearly  seven  thousand  addition- 


THE    PAYING    TELLER 

al  accounts.  The  problem  this  brought  was  how  to  arrange 
to  care  for  nearly  fifteen  thousand  accounts  requiring  forty 
individual  ledgers  to  hold  them  in  a  manner  to  give  satis- 
factory service  to  the  depositors. 

"At  some  time  in  my  life  I  picked  up  the  idea  that  if 
anything  was  too  large  to  handle  as  an  entirety,  the  proper 
solution  was  to  reduce  it  into  parts;  and  recognizing  the 
successful  application  of  this  principle  in  the  organization 
of  the  modern  department  store,  which  is  nothing  more  than 
an  aggregation  of  small  stores  and  up  to  a  certain  point  un- 
der separate  control  and  management,  I  asked  myself  the 
question,  Why  not  divide  the  bank  up  into  a  number  of  small 
banks,  in  alphabetical  sub-divisions,  each  to  have  its  own 
clientage  and  each  to  be  under  the  control  of  one  teller  who 
should  receive  as  well  as  pay  and  who  should  have  an  assist- 
ant to  do  such  work  as  the  teller  might  see  fit  to  turn  over 
to  him — thus  following  out  the  methods  of  the  smallest 
country  bank. 

"While  this  plan  recommended  itself  theoretically,  and 
seemed  to  offer  a  satisfactory  solution  of  the  problem,  it  was 
such  an  innovation  in  the  field  of  commercial  banking  that  it 
was  with  some  hesitation  that  I  advanced  the  idea.  Our 
tellers  unanimously  pronounced  it  entirely  impracticable  for 
them  to  both  pay  and  receive.  Not  believing  their  position 
to  be  well  taken,  having  performed  the  same  duties  in  a 
country  bank  myself,  I  concluded  to  make  the  innovation 
and  give  the  scheme  a  trial.  To  do  'this  required  a  change  in 
the  construction  of  the  counter  line.  I  arranged  to  divide 
the  bank,  as  it  were,  into  nine  small  banks — one  for  lady 
customers  exclusively,  and  eight  according  to  the  following 
sub-divisions  of  the  alphabet:  A-B,  C-D,  E-G,  H-K,  L-M, 
N-R,  S,  T-Z. 

"In  carrying  out  the  plan,  eight  cages  were  constructed 
on  one  side  of  the  bank,  the  ladies'  department  being  re- 
moved for  convenience' to  another  location;  each  cage  of  the 
same  size,  nine  feet  long  and  six  feet  wide,  with  two  win- 
dows in  each  at  the  counter  line,  one  marked  'Teller'  and 
one  'Assistant,'  with  a  compartment  back  of  each  cage  four 
and  one-half  feet  wide  by  nine  feet  long,  for  a  bookkeeper 
to  handle  the  detailed  ledger  containing  the  accounts  of  the 
depositors  whose  names  commenced  with  the  letters  on  the 
front  of  the  cage. 


140  THE    PRACTICAL  WORK  OF   A   BANK 

"In  the  working  out  of  the  system  the  amount  of  cash 
necessary,  and  to  be  adjusted  from  time  to  time,  is  given 
into  the  custody  of  each  teller  to  remain  in  his  possession  and 
under  his  control,  a  coin  truck  being  provided  for  each, 
which  is  locked  and  wheeled  into  the  coin  vault  at  night  and 
taken  out  each  morning  by  the  teller  and  placed  in  the  cage 
under  the  counter  in  a  place  provided  for  it  between  the 
teller's  and  assistant's  windows.  Both  the  teller  and  his 
assistant  handle  the  cash,  ,and  at  the  close  of  the  day's  work 
both  are  required  to  count  it  and  initial  the  teller's  sheet 
which  is  turned  into  the  auditor.  It  is  made  the  duty  of  the 
auditor  to  count  the  cash  in  the  possession  of  each  teller  at 
irregular  intervals,  not  more  than  six  days  apart,  and  turn 
in  a  report  of  his  findings  to  the  cashier. 

"The  object  of  having  the  bookkeeper  immediately  be- 
hind the  cage  is  for  the  convenience  of  the  teller  or  his  as- 
sistant in  securing  information  in  regard  to  the  condition  of 
the  depositor's  account. 

"The  objects  gained  by  the  system  are: 

"First — Retaining  the  personal  equation  between  the 
teller  and  his  customer.  By  dividing  the  alphabet  so  that 
all  customers  whose  names  begin  with  A-B,  etc.,  transact 
their  business  at  one  cage,  it  makes  a  clientage  for  each  cage 
of  from  1,500  to  1,700  depositors,  a  number  that  it  is  entire- 
ly possible  for  the  teller  to  know  personally,  giving  the  teller 
the  advantage  of  being  able  to  call  his  customer  by  name 
and  to  become  acquainted  with  the  standing  of  the  depositor 
and  the  character  of  his  account,  allowing  the  teller  to  render 
better  and  prompter  service  than  would  otherwise  be 
possible. 

"Second — The  system  properly  handled  prevents  the  for- 
mation of  long  lines  before  the  tellers'  windows,  thus  ex- 
pediting the  transactions  of  business  and  preventing  con- 
gestion in  the  lobby.  All  customers  fall  in  line  in  front  of 
the  teller's  window.  The  duty  of  the*  assistant  is  only  to  do 
such  things  as  the  teller  may  direct  and  not  take  any  busi- 
ness on  his  own  initiative.  When  a  customer  presents 
himself  at  the  teller's  window  desiring  an  assortment  of 
change  to  make  up  a  payroll,  or  with  a  long  list  of  items  on 
a  deposit  slip  to  check  up,  transactions  that  take  time  and 
so  impede  the  progress  of  the  line,  the  teller  passes  the  trans- 
action over  to  his  assistant  and  requests  the  customer  to  fall 


THE    PAYING    TELLER  141 

back  to  the  assistant's  window  and  receive  his  payroll  or  his 
pass-book  containing  the  proper  credit  entry.  If  the  teller 
uses  discretion  in  .handling  the  business  as  indicated,  it  re- 
sults in  the  formation  of  two  lines — one  a  fast-moving  line 
in  front  of  the  teller's  window,  and,  when  necessary,  a  slow- 
moving  line  at  the  assistant's  window,  each  customer  in 
which,  if  kept  waiting,  keeps  somebody  else  waiting  in  turn 
and  consequently  has  no  just  cause  of  complaint. 

"Third — The  advantage  to  the  customer  in  allowing  him 
to  transact  all  of  his  business  with  one  teller  at  one  window. 
The  depositor  that  desires  to  cash  a  check  as  well  as  make  his 
deposit  appreciates  the  opportunity  of  being  able  to  do  both 
at  one  window  rather  than  to  be  obliged  to  work  his  way  up 
in  line  to  a  receiving  teller's  window  and  then  fall  back  and 
work  his  way  up  again  in  a  line  to  the  paying  teller's 
window. 

"After  a  trial  of  over  a  year  and  a  half,  all  our  tellers 
are  convinced  that  the  method  is  entirely  feasible  and  say 
that  they  cannot  see  how  the  same  volume  of  business  could 
be  handled  by  the  old  system  of  segregating  the  paying  and 
receiving  tellers;  the  customers  express  their  appreciation  of 
the  service  rendered,  and  the  management  of  the  bank  feel 
that  the  innovation  has  succeeded  in  solving  the  difficult 
problem  of  handling  the  large  number  of  accounts  in  a 
manner  far  ahead  of  all  expectations. 

"To  give  some  idea  of  the  volume  of  business  passing 
through  the  bank,  I  would  state  that  in  one  day  recently  we 
handled  in  the  various  departments  over  twenty-two 
thousand  items." 

PROVERBS  or  A  PAYING  TELLER.* 

It  is  more  blessed  to  pay  than  receive,  for  at  the  end  of 
the  month  thy  recompense  is  greater  than  his. 

Moreover  in  union  there  is  strength:  therefore  happy  is 
he  whose  salary  is  fixed  by  the  board,  rather  than  by  the 
officer. 

My  son,  despise  not  an  overage  and  in  the  latter  day  it 
shall  requite  thee,  for  a  false  balance  is  an  abomination;  but 
a  five-dollar  shortage  is  simply . 

8J.  S.  MacDonnell  of  the  First  National  Bank  of  Pasadena,  Cal.  Paper 
read  before  Los  Angeles  Chapter,  American  Institute  of  Banking. 


142  THE    PRACTICAL  WORK  OF   A   BANK 

The  forward  man  stoppeth  payment  upon  a  check;  and 
she  that  loseth  a  voucher  diggeth  a  pit. 

Better  is  a  little  cash  and  a  just  balance  than  much  cur- 
rency and  a  shortage  therewith. 

The  foolish  woman  telephoneth  for  her  balance;  but  the 
wise  teller  seeth  her  first. 

He  that  is  short-changed  returneth  again;  but  the  one 
with  the  extra  ten  tarrieth  not. 

The  cashier  hath  forbidden  an  overdraft  and  pay-day  is 
afar  off;  but  he  knoweth  not  that  the  employee's  check  is  in 
the  cash. 

The  customer  layeth  wait  and  the  messenger  lurketh 
privily  to  destroy  thee  without  a  cause ;  but  a  good  endorse- 
ment is  a  strong  tower. 

Who  hath  woes,  who  hath  sorrow,  who  hath  redness  of 
eyes,  even  he  that  cometh  upon  a  counter  error  two  days 
afterward.  Verily  he  seeketh  in  vain  for  help. 

Seest  thou  thy  neighbor  diligent  in  checking  over  the 
day's  work?  Say  not,  "Hast  thou  a  difference?"  Even  a 
fool,  when  he  holdeth  his  peace,  is  counted  wise.  Mayhap  he 
practiceth  penmanship  or  seeketh  some  reason  why  his  salary 
has  been  raised. 

As  a  man  that  taketh  away  a  garment  in  winter,  so  is  he 
that  singeth  songs  when  thou  hast  a  difference. 

He  that  whistleth  over  his  work  and  he  that  robbeth  a 
dead  body  are  on  their  way  to  the  same  place. 

The  Treasury  sendeth  new  currency  and  the  clerk  cut- 
teth  it  asunder;  but  the  naughty  person  winketh  with  his 
eyes  and  sayeth,  "Aha,  aha,  thou  art  making  money  fast." 
Of  the  surety,  one  generation  passeth  away  and  another  gen- 
eration cometh;  but  that  joke  abideth  forever. 

Seest  thou  a  man  getting  a  check  book  for  his  wife?  Jest 
not  with  him,  lest  he  tell  thee  that  hoary  one  regarding  her 
overdraft  and  all  the  stubs  she  had  remaining. 

This  have  I  observed — one  man  hideth  his  money  in  his 
bosom  and  another  putteth  it  in  his  trousers'  pocket ;  but  the 
stout  woman  hath  them  skinned  to  death  for  a  safe  place. 

I  had  rather  be  a  doorkeeper  in  the  house  of  the  Lord 
than  count  the  collections  therefrom  on  Monday. 

Six  things  do  I  hate,  yea,  seven  are  an  abomination  unto 
me;  a  stop  payment,  a  go-back,  an  overdraft,  he  that  coughs 
in  thy  face, -he  that  dabbleth  in  the  cash,  the  deaf  man  that 


THE    PAYING    TELLER  148 

cannot  be  identified  and  one  from  just  beyond  the  Needles, 
who  speaketh  as  a  wise  man  of  the  East. 

Hearest  thou  one  that  saith,  "Lo,  this  is  done  in  the 
East,"  or  "Lo,  it  was  never  on  this  wise  in  the  East."  Pass 
not  nigh  unto  him,  for  a  hayseed  lurketh  in  his  hair,  neither 
hath  he  at  any  time  been  a  day's  journey  from  his  own 
dunghill. 

One  woman  leaveth  her  glasses  at  home  and  another  is 
nervous  in  the  morning;  but  she  that  signeth  her  name  with- 
out making  excuse,  the  same  is  not  a  bride. 

Happy  is  the  woman  that  findeth  new  currency,  for  the 
merchandise  of  it  is  better  than  the  merchandise  of  silver. 

He  that  bringeth  a  "go-back"  in  season  receiveth  fine 
gold,  but  a  slothful  messenger  receiveth  a  fine  without  gold. 

The  nervous  man  rusheth  in  haste  to  the  wicket,  he 
snatcheth  the  coin  and  hasteth  away;  also  he  treadeth  heav- 
ily upon  the  feet  of  the  innocent;  but  the  prudent  one  catch- 
eth  the  same  car,  neither  forgetting  his  umbrella. 

Once  have  I  observed  this,  yea,  twice  have  I  known  it; 
for  the  simple  one  sayeth,  "It  is  all  one,  pay  me  silver  or 
gold,  large  money  or  small,  it  matters  not,  seeing  it  is  soon 
spent."  Possess  thy  soul  and  wait  upon  him  patiently,  for 
he  will  not  depart  until  thou  hast  changed  all  his  money 
seven  fold. 

He  that  introduceth  a  friend  and  will  not  endorse  for 
him,  hath  not  understanding,  and  to  argue  with  him  is  like 
casting  pearls  before  swine. 

The  foolish  one  saith,  "Lo,  I  have  covenanted  with  a 
gold  piece  for  a  newspaper,  and  with  a  five-dollar  piece  have 
I  purchased  a  ride  on  a  street  car,  therefore  pay  me  in  cur- 
rency, lest  my  riches  depart  from  me  for  that  which  is 
naught."  My  son,  refrain  thyself  from  him,  for  he  never 
had  more  than  four  dollars. 

My  son,  put  not  thy  trust  in  perfume.  Follow  hard 
after  her  if  thou  wilt,  but  look  up  her  check  first. 

THE  ACID  TEST  FOR  COINS 

Formulas  to  make  the  acids  for  the  tests  of  gold  and 
silver  are  as  follows : 

For  gold :  Six  and  one-half  drams  nitric  acid,  one-quarter 
dram  of  hydrochloric  acid  and  five  drams  of  water. 


144  THE   PRACTICAL  WORK  OF   A   BANK 

For  silver:  Twenty- four  grains  silver  nitrate,  thirty 
drops  of  nitric  acid  and  one  ounce  of  water. 

If  after  a  careful  examination  of  the  coin  the  first  sus- 
picion is  not  allayed,  the  acid  test  may  be  used.  If  it  does 
not  affect  the  coin,  then  the  metal  is  genuine,  but  if  it  turns 
it  black,  the  coin  is  counterfeit. 

LEGAL-TENDER  AND  REDEMPTION  QUALITIES  OF  UNITED 

STATES  MONEY 

The  money  in  circulation  in  the  United  States  consists  of 
gold,  silver,  nickel,  and  bronze  coins,  certificates  representing 
coin,  and  notes,  all  issued  by  the  Government,  and  notes 
issued  through  the  Federal  reserve  banks  and  national  banks 
under  Government  regulations.  The  gold  dollar  is  the  stand- 
ard unit  of  value.  Both  gold  coins  and  standard  silver  dol- 
lars are  standard  money.  Lawful  money  is  a  term  used  to 
denote  the  legal-tender  quality  of  money  and  first  originated 
in  the  act  of  February  25,  1862.  authorizing  the  issue  of 
United  States  notes.  Legal  tender  is  a  quality  given  a  cir- 
culating medium  by  Congress,  and  possessing  this  quality  it 
becomes  lawful  money.  All  forms  of  money  do  not  possess 
full  legal-tender  qualities,  yet  each  kind  has  attributes  as  to 
give  it  currency,  and  all  forms  are  convertible  into  standard 
money.  The  Secretary  of  the  Treasury  is  required  to  main- 
tain the  parity  of  all  kinds  of  money  with  the  standard  unit  of 
value,  and  if  necessary  to  maintain  such  parity  he  is  author- 
ized to  borrow  or  buy  gold. 

The  status  of  each  kind  of  money  is  as  follows : 

1.  Gold  coin  is  legal  tender  at  its  nominal  or  face  value 
in  payment  of  all  debts,  public  and  private,  when  the  coin  is 
not  below  the  standard  weight  and  limit  of  tolerance  pre- 
scribed by  law,  and  when  below  such  standard  weight  and 
limit  of  tolerance  it  is  legal  tender  in  proportion  to  its  weight. 
Being  standard  money,  gold  coins  are  not  redeemable.   . 

2.  Gold  certificates  are  now  legal  tender,  and  are  receiv- 
able for  all  public  dues  and  when  so  received  may  be  reissued, 

Note:  There  are  several  protecting  devices  on  the  market,  some  cutting  the 

figures  out  of  the  paper,  others  stamping  the  words  "not  over  —  Dollars" 

into  the  fibre  of  the  paper.  Other  devices  called  "check  writers"  impress  the 
exact  amount  in  words  into  the  paper  on  the  line  provided  for  writing  the 
words.  The  author  leaves  it  to  the  reader's  judgment  as  to  the  mechanical 
qualities  of  each.  They  are  all  based  on  the  one  idea — of  impregnating  the  paper 
with  an  acid-proof  ink  in  such  manner  as  to  destroy  the  surface  of  the  paper 
and  prevent  alteration. 


THE  PAYING  TELLER  144a 

and  they  may  be  held  by  Federal  reserve  and  national  banks 
as  lawful  reserve.  Gold  certificates  are  receipts  for  actual 
deposits  of  gold  in  the  Treasury  and  are  redeemable  in  gold 
coin  by  the  Treasurer  and  all  assistant  treasurers  of  the 
United  States. 

3.  Standard  silver  dollars  are  legal  tender  at  their  nom- 
inal or  face  value  in  payment  of  all  debts,  public  and  private, 
without  regard  to  the  amount,  except  where  otherwise  ex- 
pressly stipulated  in  the  contract.     Being  standard  money, 
standard  silver  dollars  are  not  redeemable. 

4.  Silver  certficates  are  not  legal  tender,  but  like  gold 
certificates  they  are  receivable  for  all  public  dues  and  when  so 
received  may  be  reissued,  and  they  may  be  held  by  Federal 
reserve  and  national  banks  as  lawful  reserve.     Silver  certifi- 
cates are  receipts  for  actual  deposits  of  standard  silver  dollars 
in  the  Treasury  and  are  redeemable  in  such  dollars  only. 

5.  Treasury  notes  of  the  act  of  July  14,  1890,  are  legal 
tender  for  all  debts,  public  and  private,  except  where  other- 
wise expressly  stipulated  in  the  contract.    They  are  redeem- 
able in  United  States  gold  coin  or  in  standard  silver  dollars 
at  the  option  of  the  holder  by  the  Treasurer  and  all  assistant 
treasurers  of  the  United   States.     When  received  by  the 
Treasurer  they  are  canceled  and  replaced  by  silver  certificates. 

6.  United  States  notes  (also  known  as  greenbacks  and 
legal  tenders)  are  legal  tender  for  all  debts,  public  and  pri- 
vate, except  duties  on  imports  and  interest  on  the  public  debt. 
Upon  the  resumption  of  specie  payments  January  1,  1879, 
these  notes  were  accepted  in  payment  of  customs  dues  and 
have  been  freely  received  on  that  account  since  though  the 
law  has  not  been  changed.     They  are  redeemable  in  United 
States  gold  coin  in  any  amount  by  the  Treasurer  or  any  assist- 
ant treasurer  of  the  United  States,  and  when  received  are 
reissued. 

7.  Federal  reserve  notes  are  not  legal  tender,  but  are  re- 
ceivable by  the  Government  for  all  public  dues  and  are  receiv- 
able on  all  accounts  by  all  Federal  reserve  banks,  national 
banks  and  other  banks  members  of  the  Federal  Reserve  Sys- 
tem.    They  are  redeemable  in  gold  coin  of  the  United  States 
by  the  Treasurer  and  in  gold  or  lawful  money  by  any  Federal 
reserve  bank. 

8.  Subsidiary  silver  coins  are  legal  tender  for  amounts 
not  exceeding  $10  in  any  one  payment.     They  may  be  pre- 
sented in  sums  or  multiples  of  $20  to  the  Treasurer  or  any 

10 


144b  THE  PRACTICAL  WORK  OF  A  BANK 

assistant  Treasurer  of  the  United  States  for  redemption  or 
exchange  into  lawful  money. 

9.  Minor  coins  of  nickel  and  bronze  are  legal  tender  to 
the  extent  of  25  cents.     They  may  be  presented  for  redemp- 
tion or  exchange  under  the  same  conditions  as  are  provided 
for  subsidiary  coins. 

10.  National  bank  notes  are  not  legal  tender,  but  are  re- 
ceivable for  all  public  dues  except  duties  on  imports,  and  may 
be  paid  out  by  the  Government  for  all  purposes  except  inter- 
est on  the  public  debt  and  for  redemption  of  national  bank 
notes.     They  are  redeemable  in  lawful  money  of  the  United 
States  by  the  Treasurer,  but  not  by  the  assistant  treasurers, 
and  are  also  redeemable  at  the  bank  of  issue. 

11.  Federal  reserve  bank  notes  are  identical  in  all  their 
attributes  with  national  bank  notes. 

Foreign  coins  are  not  legal  tender. — Section  3584  of  the 
Revised  Statutes  of  the  United  States  provides  that  no  for- 
eign coin  shall  be  a  legal  tender  in  the  United  States. 

"Coin"  obligations  of  the  Government  are  redeemed  in 
gold  coin  when  gold  is  demanded  and  in  silver  when  silver  is 
demanded. 


CHAPTER  VII. 

CLEARINGS  AND  CLEARING-HOUSES 

The  settlements  which  a  bank  makes  with  its  customers 
are  riot  in  the  main  in  cash  over  the  counter,  but  through 
the  medium  of  bank  clearing  machinery  which  offsets  the 
debts  of  one  bank  against  the  debts  of  another  in  total, 
whatever  difference  there  exists  being  paid  in  money.  It  is 
apparent  that  if  a  bank  were  to  assemble  all  the  checks  it 
receives  in  the  course  of  the  day  on  every  other  bank,  and 
present  them  over  the  various  counters  and  receive  payment 
in  cash,  it  would  not  only  require  the  use  of  a  large  amount 
of  money,  but  consume  time,  involve  risk  and  prove  highly 
unsatisfactory  to  all  concerned.  The  most  likely  substitute 
would  be  for  the  banks  to  exchange  checks,  and  adjust  the 
differences.  If  there  were  not  many  banks  in  the  same  city 
the  interchange  of  checks  in  this  manner  might  be  satisfac- 
tory, but  it  would  be  cumbersome:  and  if  messengers  were 
to  be  sent  out  to  do  this  work,  they  would  no  doubt  soon 
evolve  a  plan  whereby  they  might  meet  at  some  central  point 
and  make  their  exchanges. 

The  clearing-house  has  been  defined  as  "an  institution 
maintained  by  an  association  of  banks,  acting  under  self- 
governing  rules,  for  the  purpose  of  facilitating  concerted 
action  among  its  members  in  adjusting  accounts  against 
each  other  with  the  greatest  ease  and  at  a  minimum  cost,  and 
to  strengthen  the  credit  of  all  members  by  mutual  watchful- 
ness and  assistance  in  times  of  stringency." 

The  clearing-house  is  not,  as  a  rule,  finely  housed  as  is 
the  New  York  Clearing-House,  whose  palace  of  marble  and 
bronze  is  one  of  the  ornaments  of  lower  New  York,  but  it  is 
more  often  a  simple  organization  of  banks,  meeting  in  a 
convenient  place  from  time  to  time,  and  making  the  daily 
settlements  through  a  bank  selected  for  that  purpose. 

It  is  the  greatest  embodiment  of  the  "get-together"  idea 
in  banking  circles.  Through  it  the  use  of  banking  credit 
reaches  its  highest  perfection  and  cash  is  reduced  to  its 
proper  place  in  the  economic  scheme — the  settler  of  balances. 
The  New  York  Clearing-House  has  settled  exchanges 

145 


146  THE   PRACTICAL  WORK  OF   A   BANK 

amounting  to  $3,570,157,362,589.60  in  sixty-seven  years,  with 
but  $207,269,155,417.66. 

ORIGIN  or  THE  CLEARING-HOUSE 

The  clearing-house,  although  originally  intended  as  a 
simple  arrangement  to  assist  members  in  making  a  daily 
exchange  of  checks  and  settlement  of  balances,  has  grad* 
ually  become  the  effective  medium  of  cooperation  among 
banks  in  all  matters  of  mutual  interest  and  in  matters  affect- 
ing the  financial  well-being  of  the  community  served.  In 
the  development  of  the  movement,  new  functions  have  been 
added  and  each  step  has  been  taken  with  the  idea  of  protect- 
ing its  members  and  insuring  banking  and  business  stability. 
In  each  financial  crisis  clearing-houses  have  taken  the  initia- 
tive in  suggesting  and  causing  the  members  to  adopt  reme- 
dial measures  in  the  interest  of  the  banks  and  the  general 
public. 

The  clearing  principle  dates  back  to  about  1775,  al- 
though before  that  time  it  is  possible  men  balanced  their 
affairs  by  an  exchange  of  credit.  The  clearing-houses  of 
old  were  the  great  periodical  fairs,  whither  went  merchants, 
great  and  small,  bringing  their  "tallies"  to  settle  their  mu- 
tual indebtedness.  "Justiciaries"  were  set  over  the  fairs  to 
hear  and  determine  all  commercial  disputes,  and  to  prove 
the  "tallies"  according  to  the  commercial  law,  if  the  plaintiff 
desired  this.  These  "tallies"  were  notched  sticks  of  hazel- 
wood,  split  down  the  center,  one  part  going  to  the  debtor 
and  the  other  to  the  creditor.  The  most  famous  of  these 
fairs  in  England  was  that  of  St.  Giles,  while  probably  the 
most  famous  in  all  Europe  were  those  of  Champagne  and 
Brie  in  France,  to  which  went  merchants  and  bankers  from 
all  countries.  Exchange  booths  were  established  and  debts 
and  credits  were  cleared  to  enormous  amounts  without  the 
aid  of  a  single  coin.1 

Claim  is  made  that  as  early  as  the  fifteenth  century  the 
merchants  of  Naples  had  an  arrangement  for  the  clearing  of 
claims.  About  1773,  in  London,  the  collecting  clerks  con- 
nected with  banking  houses  arranged,  for  their  own  con- 
venience, to  meet  at  an  agreed  point  to  exchange  checks  and 


»A.  Mitchell  Inness,  "What  is  Money." 


CLEARINGS    AND    CLEARING-HOUSES  147 

items.  The  merchants  and  bankers  recognized  the  saving  of 
time  and  expense  in  having  a  convenient  place  to  make  ex- 
changes and  provided  a  building  for  the  purpose.  In  this, 
the  first  clearing-house,  the  members  had  not  only  the  advan- 
tage of  a  common  meeting  place,  but  they  were  able  to  make 
use  of  the  clearing  principle,  which  is  the  offsetting  of  debts 
and  credits  and  the  settlement  of  balances. 

This  system  was  soon  followed  in  continental  countries. 
In  1858,  the  London  Clearing-House  established  a  depart- 
ment for  the  collection  of  country  checks.  The  problem  in 
the  European  countries  is  somewhat  different  from  ours. 
There  the  banking  is  highly  centralized.  In  England,  for 
instance,  there  are  but  few  banks,  but  the  banks  have  hun- 
dreds of  branches  scattered  throughout  the  country,  the 
activities,  however,  centering  in  London.  Each  bank  is  real- 
ly a  clearing-house  in  itself,  at  least  of  credit  and  trade  in- 
formation. 

The  London  Clearing-House  has  but  few  members,  but 
the  banks  with  their  numerous  branches  represent  a  large 
portion  of  the  banking  power  of  England.  The  clearing- 
house itself  is  a  wonderful  institution,  existing  primarily 
for  the  exchange  of  checks.  There  are  two  clearings  a  day, 
balances  being  settled  by  drafts  on  the  Bank  of  England. 

In  the  United  States  the  first  suggestion  in  regard  to 
clearing-houses  was  made  by  Albert  Gallatin  in  1831.  In 
1853  the  bank  messengers  in  New  York  were  in  the  habit 
of  meeting  at  a  point  in  Wall  Street  to  exchange  checks 
and  notes.  As  in  the  case  of  the  London  clerks,  this  ar- 
rangement was  for  convenience.  The  necessity  was  recog- 
nized by  the  bankers  and  on  November  11,  1853,  represen- 
tatives of  fifty-two  banks  met  and  adopted  a  plan  for  the 
daily  clearing  of  checks  and  settlement  of  balances  and  a 
building  was  provided  for  the  purpose.  The  action  of  the 
New  York  bankers  was  followed  in  Boston  in  1856,  Phila- 
delphia in  1858,  Chicago  1865,  St.  Louis  1868  and  at  other 
points,  until  to-day  there  are  about  one  hundred  and 
eighty-two  regularly  organized  clearing-house  associations. 
In  about  fifty  other  localities  clearing  arrangements  exist. 

How  effectively  the  clearing-house  obviates  the  use  of 
money  will  be  seen  from  the  fact  that  a  Boston  bank  sent 
to  the  Boston  Clearing-House  checks  to  the  amount  of  $11,- 
000,000  and  had  a  debit  balance  of  only  $2,800.49.  At  an- 


148  THE   PRACTICAL  WORK  OF   A   BANK 

other  time  it  settled  a  debit  against  it  of  $6,180,000  with 
$167.31.  The  largest  transactions  during  any  one  day  in 
1919  in  the  New  York  Clearing  House  were  $1,384,614,- 
055.95  December  16,  1919,  the  largest  on  record.  The  small- 
est exchanges  were  those  of  April  3,  1920,  $473,298,385.51. 
The  total  clearings  made  during  the  67  years  the  New  York 
Clearing  House  has  been  in  operation  aggregate  the  enor- 
mous sum  of  $3,570,157,362,589.60.  The  largest  average 
daily  clearings  were  in  1920— $830,060,031.13.  The  largest 
debit  balance  paid  by  any  one  institution  to  the  New  York 
Clearing-House  was  for  $37,661,685.00  on  October  3,  1905. 
The  largest  balance  received  by  any  member  from  the  clear- 
ing-house was  for  $34,086,068.54  on  January  23,  1914.  The 
smallest  balance  ever  settled  at  the  clearing-house  was  for 
$0.01  on  September  22,  1862.  Seven  millions  on  a  credit 
sheet  have  been  settled  through  the  clearing-house  for  ten 
cents.  The  Boston  City  Bank  has  settled  a  day's  clearings 
without  having  any  balance,  but  these  instances  are  rare. 

THE  LARGEST  CHECK  EVER  PAID* 
(See  footnote  page  150.) 

The  largest  check  on  record  was  drawn  by  Kuhn,  Loeb 
&  Company  on  the  National  Bank  of  Commerce  in  payment 
for  $49,000,000  of  four  and  one-half  per  cent,  bonds  re- 
cently sold  to  them  by  the  Pennsylvania  Railroad. 

The  check,  which  included  accrued  interest,  was  for  $49,- 
098,000.  Two  Pennsylvania  officials  came  over  from  Phila- 
delphia to  receive  it,  and  deposited  it  in  the  National  Bank 
of  Commerce  to  the  credit  of  the  railroad. 

The  principal  transaction  thus  involved  no  actual  money 
payment,  but  was  accomplished  by  a  book  entry,  the  Nation- 
al Bank  of  Commerce  charging  the  amount  to  one  depositor 
and  crediting  it  to  the  other. 

For  this  reason  there  was  no  enormous  balances  at  the 
clearing-house  on  account  of  this  bond  sale,  as  there  was 
when  payment  was  made  by  Kuhn,  Loeb  &  Company  and 
W.  A.  Read  &  Company  for  $51,000,000  bonds  of  the  State 
of  New  York  a  year  ago,  when  $34,000,000  in  cash  was 
taken  away  in  one  day  by  the  Bank  of  the  Manhattan 
Company. 

«New  York  "Times,"  February  18,  1915. 


CLEARINGS    AND    CLEARING-HOUSES  149 

Yesterday  was  not  only  the  time  set  for  Kuhn,  Loeb  & 
Company  to  pay  for  the  bonds,  but  also  for  payment  to  be 
made  to  them  by  the  individuals,  insurance  companies,  sav- 
ings banks,  estates,  or  others  who  had  subscribed  for  them 
when  publicly  offered  by  the  bankers.  These  subscribers 
paid  five  per  cent,  of  the  amount  subscribed  for  about  two 
weeks  ago  and  the  balance  due  on  the  bonds  awarded  to 
them  yesterday. 

The  issue  was  oversubscribed  five  times  and  in  general 
the  bidders  got  about  eighteen  per  cent,  of  the  amounts 
they  sought,  so  that  the  five  per  cent,  payment  on  their  bids 
amounted  to  fully  twenty-five  per  cent,  of  the  total  pay- 
ments to  be  made,  and  the  balances  paid  yesterday  were 
less  than  seventy-five  per  cent. 

GOES  BACK  TO  ORIGINAL  BANKS 

In  the  aggregate  these  payments,  including  the  first  five 
per  cent.,  were  more  than  $49,000,000.  The  payments  were, 
therefore,  $50,715,000  and  accrued  interest.  Most  of  these 
payments,  including  the  checks  received  yesterday,  were  de- 
posited by  Kuhn,  Loeb  &  Company  in  the  National  Bank 
of  Commerce  and  constituted  the  bulk  of  the  credit  against 
which  Kuhn,  Loeb  &  Company  drew  the  $49,000,000  check. 
The  Pennsylvania  Railroad  having  deposited  the  check  and 
established  a  credit  of  that  amount  in  the  bank,  next  drew 
a  series  of  checks  to  distribute  the  amount  among  a  number 
of  banks. 

The  usual  practice  in  these  transactions  is  to  distribute 
the  proceeds  among  the  banks  on  which  the  ultimate  pur- 
chasers of  the  bonds  drew  their  checks.  This  is  done,  of 
course,  only  as  to  substantial  amounts,  and  other  variations 
generally  enter  into  the  shifting  of  credits,  but  if  the  Penn- 
sylvania adopted  this  course,  and  if  it  were  carried  out  in 
every  detail  the  net  result  would  be  that  the  Bank  of  Com- 
merce would  have  no  more  and  no  less  deposits  on  account 
of  the  bond  sale  at  the  end  of  the  day  than  at  the  beginning, 
except  for  the  profits  of  the  sale.  This  also  disregards  the 
fact  that  the  Bank  of  Commerce  may  have  participated  as 
a  member  of  the  syndicate  and  simply  considers  it  as  the  in- 
termediary through  which  the  payments  were  effected. 

In  that  case  the  checks  drawn  by  the  purchasers  of  the 
bonds  on  various  institutions  would  be  offset  in  the  clearings 


160  THE   PRACTICAL  WORK  OF   A   BANK 

to-day  by  checks  drawn  on  the  Bank  of  Commerce  and  de- 
posited in  the  various  institutions,  just  as  the  big  check  was 
offset  by  its  own  deposit.  The  whole  process  would  result  in 
each  institution  charging  the  accounts  of  its  depositors  who 
were  purchasers  with  the  amounts  of  their  checks  and  cred- 
iting the  Pennsylvania  Railroad  with  the  same  aggregate 
amount.  While  it  is  not  supposed  that  the  transactions 
were  arranged  with  this  exactitude,  it  is  believed  that  rough- 
ly this  is  what  took  place,  if  the  Pennsylvania  followed  the 
usual  practice.  (See  addenda  below.) 

VAUIETIES  OF  CLEARING-HOUSES 

Clearing-houses  are  of  two  kinds:  Clearing-houses 
and  clearing  and  supervision  houses.  The  first  kind  merely 
clears  the  checks  and  collects  and  settles  the  balances  in 
one  way  or  another ;  the  others  not  only  clear  the  checks,  but 
supervise  the  banks  through  examiners,  fix  the  rates  of 
exchange  (see  chapter  eleven),  interest  paid  on  balances, 
and  promulgate  other  stringent  rules  that  must  be  adhered 
to  under  severe  penalties.  They  are  further  classified  into 
those  which  settle  their  balances  in  cash  or  its  equivalent — 
the  clearing-house  certificate,  or  due  bill,  and  those  which 
settle  their  differences  by  draft. 

The  term  "clearing-house"  has  reference  to  the  associa- 
tion more  than  to  the  institution,  although  it  is  easier  to  con- 
ceive of  a  "house"  being  a  finely  adorned  palace  than  a  mere 
meeting  place. 

Trade  being  to  a  considerable  extent  local,  it  is  but  nat- 
ural that  a  large  part  of  the  checks  received  through  the  re- 
ceiving teller's  window  should  be  on  banks  in  the  neighbor- 

Addendum  to  second  edition 

On  March  16,  1916,  a  check  for  $43,538,131.11,  drawn  to  the  order  of  the  Guar- 
anty Trust  Company  of  New  York,  passed  through  the  New  York  Clearing-House. 
As  far  as  can  be  learned,  this  is  the  largest  bank  check  that  has  ever  passed 
through  a  clearing-house  in  the  United  States. 

This  check  was  drawn  in  payment  for  the  issue  of  Midvale  Steel  and  Ordnance 
Company  five  per  cent,  convertible  bonds,  which  were  recently  sold  by  the  syndi- 
cate headed  by  Lee,  Higginson  &  Co.,  the  Guaranty  Trust  Company  and  the 
National  City  Bank.  (The  Bankers  Magazine,  April,  1916.) 

Addendum  to  third  edition 

The  largest  check  which  has  ever  passed  through  the  New  York  Clearing 
House  so  far  as  the  records  show  was  paid  by  the  Liberty  National  Bank  during 
the  week  of  August  11,  1917,  amounting  to  $96,111,111.11,  drawn  by  Messrs.  J.  P. 
Morgan  &  Company,  to  the  order  of  the  Agents  of  the  Bank  of  Montreal  for 
the  credit  of  the  Minister  of  Finance  and  Receiver-General  of  Canada. 


CLEARINGS    AND    CLEARING-HOUSES  151 

hood,  and  these  are  collected  through  the  clearing-house  to- 
gether with  items  received  by  the  bank  from  its  corre- 
spondents for  collection.  While  the  methods  of  settling 
balances  differ  in  localities,  they  are  all  based  on  the  one 
idea — to  pay  only  the  balance.  Not  only  are  checks  paid 
thus,  but  drafts,  notes  falling  due,  certificates  and  cash  in- 
struments in  general  are  also  cleared  by  having  them  prop- 
erly accepted  and  made  payable  through  the  clearings. 

The  territory  served  by  the  clearing-house  is  usually 
local,  being  confined  to  the  limits  of  a  city;  but  a  few,  no- 
tably the  Boston  and  the  Kansas  City  Clearing-Houses, 
cover  a  wide  territory  and  act  as  the  clearing  medium  for 
hundreds  of  banks.  (See  chapter  eleven.) 

CLEARING-HOUSE  TERMS  AND  INSTRUMENTS 

It  would  naturally  be  inferred  that  the  term  "payable 
through  the  clearing-house"  meant  physically  passing  the 
instrument  through  the  building,  while  in  practice  it  merely 
means  to  pass  through  a  process  of  "clearing."  And  this 
"clearing"  simply  means  that  the  checks  of  one  bank  are 
settled  by  an  exchange  of  checks  on  the  other.  Checks  are 
often  drawn  payable  through  the  clearing-house  only,  and 
this  in  times  of  stress  obviates  the  use  of  money  over  the 
bank's  counters,  and  prevents  the  crowd  from  gathering  in 
the  lobby.  Such  restrictions  were  largely  used  in  1907.  To 
"clear"  a  check  is  to  take  it  to  the  clearing-house,  clearing- 
room  or  bank,  and  there  exchange  it  for  another  check,  pay- 
ing the  difference  in  cash.  "Clearing-house  exchanges" 
means  simply  the  checks  and  the  amount  thereof  on  hand, 
which  will  be  offered  for  "clearing"  through  the  clearing- 
house. The  "clearing-house  balance"  means,  in  the  nomen- 
clature of  banking,  the  amount  that  the  bank  owes  or  has 
due  to  it  from  the  members  of  the  clearing-house.  "Clear- 
ing-house certificates"  are  certificates  issued  by  the  clearing- 
house for  gold  deposited  in  its  vaults.  These  certificates 
are  essentially  cash,  and  so  regarded  in  settlements  and  in 
figuring  the  reserve.  They  are  issued  in  large  denominations 
—$5,000  and  $10,000 — and  are  good  only  between  banks. 
About  one-quarter  of  the  182  clearing-houses  of  the  country 
use  these  certificates,  about  forty  per  cent,  settling  by  draft 
on  other  cities. 

The  "clearing-house  due  bill"   is  given  for  items  not 


152  THE   PRACTICAL  WORK  OF   A   BANK 

cleared  for  some  reason,  or  given  in  lieu  of  certification,  as 
a  cashier's  check,  or  for  use  in  payment  of  notes  or  other 
obligations  where  cash  is  demanded.  They  are  also  used  to 
pay  balances  under  $5,000.  They  are  payable  only  through 
the  clearing-house  the  day  after  issue.  These  due  bills  are 
deposited  by  the  manager  to  his  credit  in  a  member  bank 
and  checked  against  in  favor  of  creditor  banks. 

"Clearing-house  loan  certificates"  are  used  in  time  of 
financial  stringency  to  dispense  with  the  use  of  cash.  They 
were  first  issued  in  1860,  and  in  1861,  1863,  1884,  1890,  1907 
and  1914.  They  are  secured  by  deposit  of  stocks  and  bonds 
and  commercial  paper  and  release  that  much  cash  for  other 
purposes.  High  interest  is  charged  the  bank  obtaining  them 
and  they  are,  therefore,  retired  as  soon  as  their  usefulness  is 
over.  In  some  places  they  have  been  issued  in  denomina- 
tions small  enough  to  circulate  as  money,  and  were  to  all 
intents  and  purposes  an  asset  currency.  In  New  York  they 
have  never  passed  current  except  between  banks.  On  ac- 
count of  the  interest  that  follows,  banks  will  riot  allow  them 
to  remain  out  longer  than  the  conditions  warrant.  In  times 
of  panic  the  "loan  committee"  performs  a  very  important 
function  in  its  morning  meetings,  when  it  passes  upon  the 
collateral  offered  as  security  for  these  clearing-house  cer- 
tificates, the  usual  margin  being  twenty-five  per  cent.  The 
collateral  is  pledged  with  the  clearing-house  with  power  to 
collect  and  sell  if  the  certificates  are  not  paid.  The  collat- 
eral consists  of  stocks,  bonds  and  commercial  paper,  the  lat- 
ter predominating. 

In  order  to  understand  the  magnitude  of  the  work  that 
leads  up  to  the  morning's  clearings,  we  shall  need  to  go  back 
to  the  receiving  teller's  department.  A  pen  picture  of  this 
work  is  here  presented  as  typical  of  a  large  New  York  bank. 
At  this  desk  the  half-dozen  tellers  are  busily  engaged  all 
day  receiving  the  deposits.  These  deposits  range  from  petty 
sums  up  to  millions.  To  handle  the  man}'  millions  of  dollars 
deposited  each  day  requires  not  only  a  large  force  of  men, 
but  necessitates  a  division  of  the  work,  so  that  a  proof  can 
be  made  within  a  reasonable  time.  In  this  particular  bank 
the  receiving  teller  has  sub-divided  his  department  into  three 
parts — the  main  department,  of  which  he  takes  immediate 
charge;  the  special  department,  in  charge  of  an  assistant, 
and  the  annex,  in  charge  of  another  assistant.  Up  to  two 


CLEARINGS    AND    CLEARING-HOUSES  158 

o'clock,  as  fast  as  the  teller  receives  the  deposits,  they  are 
turned  over  to  the  special  department.  This  special  depart- 
ment has  a  force  of  ten  to  twelve  experienced  men.  Four 
checkers  are  the  first  to  receive  the  deposits.  Each  man  takes 
a  deposit,  checks  it,  putting  on  the  deposit  slip  the  clearing- 
house number  of  the  bank  on  which  the  check  is  drawn,  the 
letter  "C"  if  it  is  a  cash  item,  or  "S.  D."  if  it  is  a  sight  draft. 
This  is  done  so  that  in  case  any  question  comes  up  re- 
lating to  the  deposit  or  the  check,  the  item  or  items  could 
easily  be  located.  After  the  checking  process  the  items  are 
given  to  two  men  who  put  the  "Paid"  stamp  on  them.  When 
the  stampers  turn  the  checks  over  to  the  sorters,  it  is  the 
duty  of  this  force  to  sort  the  checks  into  the  boxes  marked 
with  the  names  of  the  banks  on  which  the  checks  are  drawn. 
This  work  finished,  the  machine  men  come  into  play.  Each 
man  has  a  number  of  boxes  (representing  so  many  banks) 
assigned  to  him,  and  his  duty  is  to  list  the  checks  drawn  on 
each  bank.  For  instance,  he  has  checks  drawn  on  No.  8 
(National  City  Bank).  He  lists  them,  puts  them  aside  and 
continues  this  operation  with  the  numerous  checks  until  the 
time  arrives  for  the  closing  of  this  department,  which  is  two 
o'clock,  when  they  make  their  proof. 

Then  the  annex  is  called  into  action,  and  what  is  prob- 
ably the  busiest  part  of  the  receiving  teller's  day  begins,  for 
it  is  at  this  time  that  the  brokers  and  trust  companies  hand 
in  their  deposits.  There  are  times  when  it  is  a  very  ordinary 
occurrence  for  deposit  tickets  yards  in  length  to  be  received, 
and  upon  the  annex  devolves  the  duty  of  getting  them  out 
of  the  way.  A  large  force  takes  hold  of  this  work,  and  at 
half -past  four  they  are  ready  to  strike  a  proof. 

While  the  annex  is  working  its  way  out,  the  main  di- 
vision is  busily  engaged  in  taking  care  of  the  deposits  that 
go  to  the  credit  of  individual  depositors. 

Each  sub-division  makes  its  own  credits,  and,  after  the 
checks  are  all  taken  care  of,  they  make  a  separate  proof. 
If  all  three  divisions  prove,  the  receiving  teller  and  his  active 
men  are  disengaged  until  the  following  day.  We  now  have 
the  receiving  teller  proved,  and  having  charged  the  total  of 
his  exchanges  over  to  the  night  force.  This  force  is  com- 
posed of  fourteen  men,  who  arrive  at  the  bank  at  midnight. 
Along  with  this  force  comes  the  mail,  with  its  out-of-town 
checks  and  drafts  that  go  to  make  up  the  credits  of  the  hun- 


154  THE   PRACTICAL  WORK  OF   A   BANK 

dreds  of  banks  and  trust  companies  that  do  business  with 
this  institution. 

The  night  force,  using  the  letters  as  credits,  handle  the 
checks  in  about  the  same  manner  as  described  in  the  receiv- 
ing teller's  work.  A  second  mail  is  received  at  three  A.  M. 
and  again  another  one  at  seven  o'clock.  If,  by  chance,  the 
night  force  has  not  proved  when  eight  o'clock  arrives,  they 
go,  the  difference  being  turned  over  to  the  main  department. 
This  department  now  takes  hold  of  the  machinery  of  the 
bank.  For  general  activity  the  mail  department  is  in  a  class 
by  itself.  Here  is  where  the  reserves  of  the  bank  are  called 
into  action.  One  hundred  and  twenty-five  men  are  at  the 
disposal  of  a  clear-headed  individual,  upon  whom  rests  the 
responsibility  of  getting  in  shape  to  be  cleared  the  many 
millions  of  dollars  in  checks  that  must  be  ready  at  9.45*  At 
this  time  the  captain  is  given  control.  He  places  every  man 
at  his  station.  Each  one  knows  what  his  particular  duties 
are,  and  when  9.30  arrives  and  the  captain  orders  "all  in," 
the  general  proof  begins.  The  total  of  the  slips  are  listed  on 
the  envelopes  printed  with  the  name  of  the  bank  upon 
which  the  checks  are  drawn,  and  the  totals  of  the  envelopes 
are  called  off,  being  listed  by  two  men ;  one  taking  down  the 
amount  in  the  long  book  and  the  other  on  the  clearing-house 
sheet.  If  the  totals  of  the  long  book  and  the  sheet  prove, 
the  settling  clerk  goes  to  the  clearing-house.  The  clearing 
clerk,  with  his  assistants,  now  loses  no  time  in  getting  the 
boxes,  containing  probably  forty-five  to  fifty  thousand 
checks,  and  representing  millions  in  money,  also  to  the 
clearing-house.4 

THE  CLEARING  PROCESS 

The  clearing  process  is  simple :  All  checks  to  go  through 
the  clearing-house  are  sorted  into  batches  representing  the 
various  banks  and  those  for  whom  they  clear.  The  amounts 
are  carried  to  a  "clearing-house  settling  sheet,"  which  con- 
tains the  names  of  all  the  clearing-house  members.  The 
amount  set  opposite  each  name  is  the  total  of  the  checks  en- 
closed in  an  envelope,  and  which  the  presenting  bank  will 

*Three  clearings  are  now  made  daily  in  New  York:  9,  10  and  3  o'clock,  the 
last  for  the  purpose  of  clearing  the  return  checks  of  the  earlier  clearings.  There 
is  no  proof  struck  at  the  9  o'clock  clearing,  the  object  being  to  get  an  early  start 
The  amounts  cleared  at  9  o'clock  are  charged  against  each  other  through  the  10 
o'clock  clearing  (March,  1919). 

<A.  M.  Barrett  in  The  Bankers  Magazine. 


CLEARINGS    AND    CLEARING-HOUSES  155 

collect  from  the  other  bank  through  the  clearing-house. 
The  total  of  these  envelopes  is  its  total  credit  with  the 
clearing-house,  and  the  difference  between  the  amounts  of 
the  checks  it  brings  and  the  checks  it  receives,  its  debit  or 
credit  balance  as  the  case  may  be. 

A  credit  ticket  is  made  out  showing  the  amount  due  from 
each  bank  to  the  bank  presenting.  (Clearing-house  banks 
are  known  by  numbers  among  the  clerks,  it  being  uncommon 
to  nse  the  title  of  the  bank.  Thus,  the  National  Park  Bank 
will  always  be  referred  to  as  "54".)  There  is  also  a  column 
on  the  settling  sheet  for  the  amounts  which  will  be  presented 
against  the  bank,  and  for  these  amounts  it  must,  through 


No.  107.  £fr lu  |fnrk  ©tearing 

, . 191 

Debit  Guaranty  Trust  Company  of  N.  Y.,  Amt,  rec'd,  $ _ 

Credit  "  "  "  "  Brought,     $____ 


Debit  Balance  Due  Clearing  House 


cr.  Bai.  Due  Guaranty  Trust  Company  of  N.  Y.,  $_ 


.Settling  Clerk. 


CLEARING-HOUSE   DEBIT  TICKET 


the  clearing-house,  settle  with  the  other  banks.  Thus,  if 
the  First  National  Eank  owes  the  various  banks  of  the 
clearing-house  $500,000,  as  shown  by  ope  column,  and  has 
due  to  it  $300,000,  as  shown  by  the  other,  it  would  owe  the 
banks  as  a  whole  $200,000,  which  it  would  settle,  not  by 
paying  them,  but  by  paying  the  clearing-house,  the  clearing- 
house in  turn  paying  the  various  banks.  While  one  bank 
might  owe  another,  it  might  still  have  a  balance  due  it  from 
the  banks  as  a  whole.  In  other  words,  the  banks  all  pay  to 
the  clearing-house  the  amount  they  owe  and  the  clearing- 
house distributes  the  amount  among  those  to  whom  it  is  due. 
When  the  sheet  is  ready  for  the  clearing-house  it  is  given  to 
the  settling  clerk,  who  must  be  a  rapid  and  accurate  worker, 
and  who  is  accompanied  by  a  delivery  clerk.  The  checks  of 
some  of  the  New  York  banks  are  so  numerous  that  it  some- 
times requires  two  men  to  carry  the  leather  case  used  for 
clearing-house  settlements. 

The  envelopes  are  arranged  consecutively  and  the  deliv- 
ery clerk  has  the  checks  and  a  duplicate  of  the  settling  sheet 


156 


THE   PRACTICAL   WORK  OF   A   BANK 


No.  107  Guaranty  Trust  Company  of  New  York 

Delivery  Clerk's  Statements 


No. 

BANKS 

AMOUNT  BROUGHT 

RECEIVED  BY 

1 

Bank  of  N.  Y.,  Nat'  1  B'k'g  Ass'n 

1 

2 

Bank  of  the  Manhattan  Company 

I 

3 

Merchant'  National  Bank 

3 

4 

Mechanics  &  Metals  Nat'l  Bank 

4 

6  . 

Bank  of  America 

6 

8 

National  City  Bank 

s 

12 

Chemical  National  Bank 

12 

13 

Merchants'  Exchange  Nat'l  Bank 

13 

15 

Nat'l  Butchers'  &  Drovers'  Bank 

15 

17 

Greenwich  Bank 

17 

21 

American  Exchange  Nat'l  Bank 

21 

23 

National  Bank  of  Commerce 

23 

28 

Pacific  Bank 

23 

30 

Chatham  &  Phenix  Natl  Bank 

30 

31 

People's  Bank 

31 

.33 

Hanover  National  Bank 

33 

No.  107  Guaranty  Trust  Company  of  New  York 

Settling  Clerk's  Statements 


No. 

BANKS 

AMOUNT  BROUGHT 

RECEIVED  BY 

1 

Bank  of  N.  Y.,  Nat'l  B'k'g  Ass'n 

1 

2 

Bank  of  the  Manhattan  Company 

2 

3 

Merchants'  National  Bank 

3 

4 

Mechanics  &  Metals  Nat'l  Bank 

4 

6 

Bank  of  Ar-  erica 

6 

8 

National  City  Bank 

8 

12 

Chemical  National  Bank 

12 

13 

Merchants'  Exchange  Nat'l  Bank 

13 

IS 

Nat'l  Butchers'  &  Drovers'  Bank 

15 

17 

Greenwich  Bank 

!7 

21 

American  Exchange  Nat'l  Bank 

21 

23 

National  Bank  of  Commerce 

23 

28 

Pacific  Bank 

n 

30 

Chatham  &  Phenix  Nat'l  Bank 

30 

31 

People's  Bank 

31 

33 

Hanover  National  Bank 

33 

DELIVERY  CLERK'S  AND  SETTLING  CLERK'S  CLEARING-HOUSE  STATEMENTS 

with  the  entries  made  thereon.  On  this  sheet  the  other  clerks 
will  receipt  for  the  amounts  when  delivered  to  them.  The 
clearing-house  manager  has  a  list  of  banks  with  provision 
for  entering  the  amount  due  to  and  from  each  bank,  these 
figures  being  obtained  from  the  slips  sent  up  by  the  settling 
clerk  upon  his  arrival. 

Each  bank  has  a  desk  behind  which  sits  the  settling  clerk. 


CLEARINGS    AND    CLEARING-HOUSES  157 

The  delivery  clerk  stands  in  front.  One  minute  before  the 
clearing  begins,  the  bell  is  sounded  as  a  signal  to  get  ready. 
On  the  tick  of  the  clock  it  is  sounded  again  and  the  line  be- 
gins to  move.  The  delivery  clerk  hands  in  his  envelope, 
with  a  ticket  showing  the  amount,  from  whom  it  came  and 
to  whom  it  goes.  The  clerk  behind  the  desk  enters  upon  his 
sheet  the  amount  shown  on  the  envelope  as  a  credit  to  the 
bank  from  which  it  comes.  His  assistant  initials  the  dupli- 
cate sheet  as  a  receipt  for  the  items.  In  the  meantime  the 
delivery  clerk  has  deposited  a  package  at  the  next  desk, 
dropped  the  ticket  and  taken  the  sheet  from  the  first  desk. 

When  the  delivery  clerk  has  completed  his  rounds  he 
will  be  before  his  own  desk,  and  will  have  delivered  all  his 
checks.  The  settling  clerk  will  have  received  all  packages 
against  his  bank,  and  the  whole  process  will  have  taken  less 
than  ten  minutes.  The  sheet  of  the  delivery  clerk  will  be 
fully  receipted  for  all  items  delivered,  and  the  settling  clerk 
will  have  received  all  items  against  his  bank,  which  he  must 
list  and  total  to  ascertain  whether  the  balance  is  for  or 
against  him.  The  delivery  clerk  counts  the  number  of 
packages,  compares  them  with  the  figures  made  by  the 
settling  clerk  on  his  sheet  and  if  found  correct  takes  them  to 
the  bank.  The  settling  clerk  remains  to  make  the  proof. 

He  totals  the  figures  and  the  result  shows  whether  the 
bank  owes  the  clearing-house  (a  debit  balance)  or  has  an 
amount  due  it  (credit  balance)  and  this  balance  is  sent  to 
the  manager.  The  amount  brought,  the  amount  received 
and  the  difference  are  listed  and  sent  to  the  clearing-house 
proof  clerk.  The  proof  clerk  has  made  similar  entries  from 
the  tickets  sent  up  to  him,  and  the  result  of  the  work  of  the 
men  on  the  floor  must  agree  with  the  result  he  has  obtained 
by  another  process.  Forty-five  minutes  are  allowed  for  the 
proof  and  there  is  a  fine  for  delay.  After  11.30  the  fines 
are  doubled.  The  longest  session  in  the  New  York  Clearing- 
House  was  caused  by  a  difference  of  ten  cents.  The  author 
has  seen  three  hundred  million  "cleared"  in  the  above  process 
in  six  minutes.  The  amounts  due  to  and  from  the  various 
banks  are  then  called  off  in  even  thousands  by  the  manager 
and  taken  down  for  the  information  of  the  banks. 

SETTLING  THE  BALANCES 
The  amounts  due  and  receivable  must  now  be  adjusted. 


158 


THE   PRACTICAL  WORK  OF   A   BANK 


No.  107 

Guaranty  Trust  Company  of  New  York 
CLEARING  HOUSE  BALANCES 


BANKS 

No. 

DR. 

Thousands 

CR. 

Thousands 

Bank  of  N.  Y.,  Nat'l  B'k'g  Ass'n 

1 

Bank  of  the  Manhattan  Company 

2 

Merchants'  National  Bank 

3 

Mechanics  &  Metals  Nat'l  Bank. 

4 

Bank  of  America 

6 

National  City  Bank 

8 

Chemical  National  Bank 

12 

Merchants'  Exchange  Nat'l  Bank 

13 

Nat'l  Butchers'  &  Drovers'  Bank 

15 

Greenwich  Bank 

17 

American  Exchange  Nat'l  Bank 

21 

National  Bank  of  Commerce 

23 

Pacific  Bank 

28 

Chatham  &  Phenix  Nat'l  Bank 

30 

People's  Bank 

31 

Hanover  National  Bank 

33 

Citizens  Central  Nat'l  Bank 

36 

National  Nassau  Bank 

40 

Market  &  Fulton  National  Bank 

42 

Metropolitan  Bank 

44 

• 

Corn  Exchange  Bank 

45 

CLEARING-HOUSE    BALANCES   ARE    CALLED    OFF    BY    THE    MANAGER    AND    TAKEN    DOWN    ON 
THESE    SHEETS   FOR    THE    BANKS'    INFORMATION 

It  is  apparent  that  in  so  short  a  time  the  bank  cannot  stop 
to  examine  the  checks  to  ascertain  if  they  are  good  or  not, 
regularly  indorsed,  payment  stopped,  or  returnable  for  some 
other  reason.  By  the  rules  of  the  clearing-house  such  ad- 
justments are  made  after  the  clearing  has  been  done.  The 
bank  pays  for  what  is  shown  on  the  envelope  and  receives 
pay  for  what  it  turns  in  and  makes  adjustments  afterward 
between  the  banks  individually. 


CLEARINGS    AND    CLEARING-HOUSES  159 

By  the  rules  of  the  clearing-house  all  checks  to  he  re- 
turned must  be  sent  to  the  bank  from  which  they  were  re- 
ceived by  a  certain  hour,  and  the  drawee  bank  must,  there- 
fore, determine  promptly  whether  or  not  the  check  is  to  be 
paid.  It  is  generally  the  function  of  the  bookkeeping  de- 
partment to  ascertain  if  the  maker  is  good  for  the  amount, 
leaving  it  to  the  paying  teller  to  pass  upon  the  regularity 
of  the  check  as  to  signature,  etc.  But  someone  in  the  bank 
must,  in  a  few  hours,  pass  upon  all  checks  that  come  through 
the  clearing,  and  failure  to  detect  the  bad  will  lead  to  loss; 
for  the  rules  are  rigid  and  binding,  and  a  check  not  returned 
before  the  stipulated  time  may  be  considered  paid.  The 
courts  have  steadily  recognized  this  rule  as  fair,  although 
leading  to  hardship  at  times. 

In  New  York,  every  bank  having  a  balance  due  to  the 
clearing-house  must  pay  the  same  by  one  o'clock,  and  this 
payment  must  be  in  form  suitable  for  reserves,  including  the 
clearing-house  gold  certificates  above  mentioned.  A  large 
part  of  the  settlements  are  made  with  these  certificates, 
which  are  in  large  denomination  and  are  used  only  in  clear- 
ing-house settlements.  Legal  tender  money,  gold  and  gold 
certificates  are  also  used.  Creditor  banks  are  paid  at  one 
o'clock  or  shortly  after.  These  balances  are  paid  over  by  the 
manager  and  receipted  for.  The  clearing-house  day  thus 
closes  as  it  began,  with  nothing  "in  the  till" — all  that  came 
in  having  been  paid  out.  The  medium  of  settlement  may  be 
different  in  different  places,  legal  tender  money  always,  of 
course,  being  acceptable.* 

CLEARING-HOUSE  SETTLEMENTS 

Settlements  may  be  made  in  one  of  seven  ways*:  (a)  By 
checks  on  debtor  banks,  given  to  creditor  banks  and  issued 
by  the  clearing-house  manager;  (b)  by  borrowing  and  loan- 
ing balances  (a  bank  instead  of  taking  its  balance  makes  a 
loan  of  it  to  another  bank  on  interest)  ;  (c)  by  the  clearing- 
house certificates;  (d)  by  drafts  on  another  city;  (e)  by  the 
clearing-house  loan  certificates;  (f)  by  cash;  (g)  by  the 
clearing-house  "due  bill,"  which  is  an  evidence  of  debt  pay- 
able through  the  clearing-house  only,  and  which  obviates  the 
use  of  cash  and  the  identification  of  the  messenger.  They 

*In  New  York,  settlements  are  now  made  by  debiting  or  crediting  the  amounts 
through  the  balances  of  the  members  in  the  New  York  Federal  Reserve  Bank. 
(December,  1920.) 


160  THE   PRACTICAL  WORK  OF   A   BANK 

are  payable  through  the  next  day's  clearing.  Where  man- 
agers' checks  are  used  they  are  given  to  creditor  banks,  and 
included  in  the  clearings  of  the  next  day. 

Some  clearing-houses  make  two  clearings  a  day,  one  for 
over-the-counter  items  of  the  day  before  and  the  other  for 
mail  and  other  items  received  too  late  for  the  first  clearing. 
In  New  York  there  are  three  clearings  (footnote,  p.  154). 
The  items  received  through  the  bank  windows  are  often  listed 
separately,  and  the  items  received  in  the  mails  added  after- 
ward, making  two  columns  which  are  totaled  for 
the  clearing. 

Tn  smaller  cities  the  clearings  are  much  more  simple  than 
obtains  in  New  York  and  are  often  performed  through  a 
bank,  the  banks  taking  turns  as  clearing  agent.  In  such 
cases  all  checks  will  be  sent  to  the  bank  with  slips  to  indi- 
cate the  amount,  and  the  bank,  acting  as  the  clearing-house, 
will  make  the  same  adjustments  as  in  large  cities,  receiving 
from  the  debtor  banks  their  drafts  on  New  York,  and  pay- 
ing the  creditor  banks  by  its  own  draft  on  New  York,  which 
settles  all  the  day's  dealings.  The  clearing  process  under 
the  latter  method  may  look  no  more  formal  than  cashing  a 
check,  while  in  New  York  it  looks  like  the  movement  of  a 
finely  organized  piece  of  machinery. 

The  number  of  items  passing  through  the  New  York 
Clearing-House  is  estimated  at  about  ,500,000  daily,  and  the 
work  that  precedes  the  clearing  can  easily  be  understood. 

OTHER  CLEARING-HOUSE  ACTIVITIES 

All  clearing-houses  exercise  the  clearing  function  and 
under  necessity  issue  certificates,  but  all  do  not  exercise  the 
supervisory  functions  that  have  been  mentioned,  especially 
in  regard  to  the  examinations.  Clearing-house  examina- 
tions are  merely  examinations  under  the  supervision  of  the 
clearing-house,  usually  by  appointed  examiners,  and  these 
examinations,  by  reason  of  the  fact  that  the  examiner  is  not 
hurried  and  has  fewer  banks  to  examine  than  the  general 
run  of  examiners,  are  on  a  high  plane  of  excellence;  and  as 
a  credit  man  the  examiner  may  be  in  closer  touch  with  the 
borrowers  of  a  single  community  than  with  those  in  a  wide 
territory,  and  can  give  much  valuable  aid  in  his  advisory 
capacity.  Chicago  and  New  York  both  have  highly  paid 
examiners. 


CLEARINGS    AND    CLEARING-HOUSES  161 

Clearing-house  administration  carries  with  it  the  coopera- 
tion of  the  banks  in  times  of  stress,  the  concerted  action  and 
the  wisdom  of  the  leaders  of  the  banking  world,  who  can, 
by  united  action,  avoid  disaster  by  their  power  to  pull  to- 
gether, the  strong  helping  the  weak. 

The  clearing-house  has  come  to  fulfill  other  important 
functions  as  a  regulating  force,  namely,  regulating  ex- 
change charges,  uniform  interest  rates,  and  the  observance 
of  ethical  principles  in  the  matter  of  advertising.  The  com- 
petition of  banks  for  business  has  led  to  the  payment  of 
excessive  interest  on  deposits,  to  the  collection  of  checks 
free,  and  other  concessions  that  have  unsettled  the  banking 
business,  and  brought  all  banks  into  competition  that  has 
proven  unhealthy.  By  an  agreement  which  is  binding  under 
penalty,  uniformity  and  fairness  have  been  established. 

Several  attempts  have  been  made  to  establish  clearing- 
house bureaus  of  credit,  where  credit  information  could  be 
assembled,  classified  and  disseminated,  but  thus  far  nothing 
has  come  of  it.  Other  regulations  include  the  indorsement 
of  checks  and  drafts,  certification,  return  of  paper  unpaid 
and  other  details  of  management  that  work  for  the  good 
of  the  whole. 

CLEARINGS  FOR  NON-MEMBERS 

Banks  which  are  not  members  of  the  clearing-house  may 
have  the  privilege  of  its  machinery  by  clearing  through 
other  banks,  by  which  is  meant,  for  instance,  that  if  the 
First  National  Bank  is  a  member  and  the  Second  National 
Bank  is  not  (there  is  no  compulsion  as  to  membership,  and 
some  banks  will  not  join  on  account  of  the  rigid  rules  en- 
forced as  to  reserves,  examinations  and  the  costs  attending), 
items  on  the  Second  National  will  be  sent  to  the  First  Na- 
tional (its  clearing  agent)  and  all  payments  to  the  Second 
National  will  be  made  to  the  First  National  for  its  account. 
The  fee  in  New  York  is  $1,500  a  year  for  this  privilege. 

Thus,  many  banks  in  Brooklyn  clear  through  New  York 
banks  by  such  an  arrangement,  and  the  clerks  must  know 
what  bank  acts  for  another  in  the  classification  of  checks  for 
the  clearing.  The  clearing  bank  is  responsible  for  all  checks 
upon  banks  for  which  it  clears.  In  the  panic  of  1907  one  of 
the  first  signs  of  danger  was  the  notice  published  by  a  clear- 
ing agent  that  it  would  no  longer  clear  for  a  certain  bank, 


162  THE    PRACTICAL  WORK  OF   A   BANK 

and  this  meant  that  it  considered  the  bank  unsound,  and 
precipitated  the  crisis.  The  simplest  arrangement  is  for  the 
non-member  bank  to  keep  account  with  the  member  bank, 
depositing  all  its  checks  in  the  clearing-house  district  with 
the  clearing  agent,  and  to  which  all  checks  drawn  on  it  will 
be  charged. 

Clearing-house  rules  are  very  strict  and  rigidly  enforced. 
Everything  is  done  on  the  dot,  and  fines  imposed  for 
offenses,  as,  for  instance,  for  listing  a  check  on  the  wrong 
bank,  tardiness,  both  in  presenting  checks  for  clearing  and 
for  delay  and  errors  in  making  totals,  and  in  making  settle- 
ments. The  fines  in  the  New  York  Clearing-House  for 
errors  are  as  follows :  Errors  on  credit  side  of  settling  clerk's 
sheet,  $3;  errors  on  debit  side  of  settling  clerk's  sheet,  $2; 
errors  in  tickets,  $2 ;  errors  in  footing  amount  received,  $1 ; 
disorderly  conduct,  $2 ;  tardiness,  $2 ;  debtor  bank  failing  to 
pay  before  1  P.  M.,  $3;  errors  in  delivery  on  receipt  of  ex- 
changes, $1;  missent  items,  $1.  These  fines  are  charged  to 
the  guilty  banks  and  statement  rendered. 

CLEARING  COUNTRY  CHECKS 

As  the  clearing-house  settles  the  balances  of  city  checks 
—in  reality  collecting  them — so  clearing-houses  may  act  as 
clearing  agencies  for  wider  territory,  the  principle  being  the 
same.  The  operation  of  the  Boston  Clearing-House  will 
illustrate  this  principle. 

Each  Boston  Clearing-House  bank  assorts  its  New  Eng- 
land checks  into  States  and  towns  and  sends  them  daily  to 
the  clearing-house,  before  a  certain  hour,  together  with  ma- 
chine lists  of  the  totals,  for  which  a  receipt  is  taken.  This 
receipt  is  then  cleared  after  a  certain  time  has  elapsed  for 
the  return  of  the  remittances.  The  clearing-house  clerks 
assort  all  the  checks  alphabetically  as  to  towns  and  States  so 
that  at  the  end  of  the  day  a  single  letter  containing  checks 
from  all  the  Boston  banks  goes  to  each  bank  in  New  Eng- 
land. Remittance  is  made  at  once  to  the  manager  of  the 
clearing-house  who  then  charges  the  drafts  to  the  banks  on 
which  they  are  drawn.  If  other  funds  than  Boston  drafts 
are  received,  due  provision  is  made.  Ninety-five  per  cent 
of  all  transactions  are  thus  settled  on  the  second  day  and  if 
any  delay  should  occur  in  the  mails  for  a  longer  period,  tern- 


CLEARINGS    AND    CLEARING-HOUSES  168 

porary  adjustment  is  made.  The  clerical  work  and  book- 
keeping entailed  is  very  simple  and  altogether  the  plan  has 
been  so  eminently  successful  that  many  other  cities  have 
adopted  similar  systems.  The  cost  to  the  Boston  banks  has 
been  about  seven  cents  per  thousand  dollars  collected.* 

The  Kansas  City  Clearing-House  collects  for  a  wider 
territory,  and  this  will  be  found  described  in  the  chapter  on 
checks  and  their  collection  (chapter  eleven). 

THE  WEEKLY  REPORT 

The  activities  of  the  clearing-house  are  many,  but  one  of 
the  chief  benefits  is  the  weekly  report  of  condition,  by  which 
the  standing  of  the  banks  as  individuals  and  the  banks  of  a 
clearing-house  district,  as  a  whole,  may  be  accurately  known. 
The  average  condition  is  reported  for  the  week,  and  also  the 
actual  condition  as  of  the  close  of  the  week.  These  fig- 
ures are  published  for  the  benefit  of  the  public.  Banks  keep 
a  record  of  the  figures  each  day  for  averaging  at  the  close 
of  the  week.  The  total  clearings  of  the  clearing-houses,  of 
course,  indicate  the  state  of  trade,  but  they  do  not  include 
those  clearings  made  inside  the  banks,  and  a  falling  off  in 
clearings  need  not  necessarily  indicate  slack  business.  Thus, 
if  two  large  banks  were  to  unite,  they  would  no  longer  clear 
the  checks  on  each  other,  but  perform  the  clearing  within 
their  own  organization  as  debits  and  credits  to  individual 
accounts,  and  the  clearings  might  show  a  falling  off,  and 
the  volume  of  business  still  be  normal. 

Statistics  are  kept  by  all  clearing-houses,  and  these  are 
fairly  indicative  of  the  condition  of  business  for  the  country. 
The  volume  of  clearings  measures,  to  a  large  extent,  the 
volume  of  business,  and  is  a  direct  public  service.  The  vary- 
ing condition  of  the  banks  is  also  known  by  these  reports, 
and  together  with  the  examinations  already  referred  to,  give 
the  banking  world  information  that  is  most  beneficial  to  the 
interest  of  all  concerned.  Weaknesses  are  detected  in  time  to 
lend  support;  unwise  methods  and  unjust  practices  are  dis- 
covered; fraud  detected;  inflation  and  misuse  of  bank  funds 
are  checked;  so  that  the  clearing-house  becomes  a  highly 
valuable  regulating  force  in  the  community. 

*In  July,  1916,  the  clearing  of  country  checks  in  New  England  was  taken  over 
by  the  Boston  Federal  Reserve  Bank.  All  New  England  checks  are  now  paid  at 
par.  (December,  1920.) 


CHAPTER  VIII. 

COLLECTIONS  AND  THE  MESSENGER 

Collection  items  are  to  be  distinguished  from  transit 
items,  in  that  transit  items  are  credited  as  cash,  and  collect- 
ed, while  collection  items  are  received  for  collection  and 
credit.  Transit  items  (usually  checks)  are  treated  as  cash; 
the  others  are  not  until  cash  or  its  equivalent  is  received  for 
them.  Collections  consist  of  notes,  drafts,  bills  of  exchange, 
coupons,  etc.,  which  have  stated  maturity,  or  for  some  rea- 
son are  not  to  be  treated  as  paid  until  proceeds  are  in  hand. 

Collection  items  may  be  divided  into  two  groups:  Those 
to  be  collected  through  messengers  and  those  to  be  collected 
through  the  mails,  using  for  that  purpose  the  bank's  regular 
correspondents,  or  a  correspondent  selected  for  the  pur- 
pose. Items  will  be  received  from  the  bank's  correspondents 
to  be  collected  either  in  person  or  to  be  forwarded,  and 
items  will  be  deposited  by  the  bank's  own  customers  for  like 
purpose.  There  will  also  be  items  held  by  the  bank  matur- 
ing from  day  to  day  that  must  be  presented  in  person  for 
collection,  and  the  messenger,  therefore,  comes  into  play  as 
the  medium  through  which  to  make  presentment  and 
collection. 

THE  MESSENGER 

Even  though  the  messenger  stands  well  toward  the  bot- 
tom of  the  banking  ladder,  he  is  an  important  part  of  its 
machinery.  He  is  charged  with  simple,  yet  important, 
duties.  His  every  act  is  surrounded  by  banking  law  and 
precedents.  It  is  of  utmost  importance  that  he  be  guided 
into  proper  methods  in  this  respect,  and  upon  his  superior 
officer  falls  the  duty  of  directing  him  aright.  Inasmuch  as 
he  is  a  novice,  he  will  simply  do  as  he  is  told,  and  the  di- 
recting officer  must  know  what  to  do  under  many  conditions 
in  order  to  keep  the  bank,  himself  and  the  messenger  within 
the  line  of  duty,  good  banking  law  and  practice. 

The  messenger  is  usually  a  beginner  in  the  banking  busi- 
ness, and  is  sometimes  called  a  "runner" — not  because  he 
runs,  but  because  he  is  on  foot  most  of  the  time,  and  should 

164 


COLLECTIONS    AND    THE    MESSENGER 


160 


always  make  haste,  if  he  does  not  run,  for  time  is  an  ele- 
ment. The  messenger  is  in  the  first  stage  of  "the  bank  man 
in  the  making,"  and  here  he  learns  his  first  lessons  in  bank- 
ing. He  is  "green"  and  can  do,  or  ought  to  do,  only  as  he 
is  told,  and  the  banker  who  can  direct  the  messenger  in  prop- 
er methods  and  keep  him  within  the  lawful  rights  of  the 
bank  and  see  that  he  does  the  proper  thing  at  the  proper 
time,  is  a  good  executive. 

The  messenger  should  have  all  the  qualities  that  the  bank 
man  of  the  future  would  be  expected  to  have.  He  must 
have  good  health.  Every  bank  man  should  have  good 
health,  and  a  sickly  messenger  is  out  of  place.  He  should 


For  Accepts  nee  and  Retu  rn, 
.Without  Protest, 


TO  THE 

Deposit  National  Bank, 

DU  BOIS,  PA. 


.  MOJ^\  Jvvo^JW  "frVg^ 


TIME    DRAFT    FOR    ACCEPTANCE    AXD    RETURK 

have  good  home  training.  He  should,  if  possible,  live  at 
home.  He  is  generally  at  the  period  of  life  when  impres- 
sions are  made  and  habits  formed  that  will  make  or  mar  his 
career  as  a  bank  man,  and  it  is  vital  that  home  influences 
be  good,  for  his  associations  will  be  with  all  classes  of  boys 
and  men.  He  should  be  neat  in  person.  It  should  be  in- 
sisted upon  that  he  have  clean  hands  and  nails,  use 
the  tooth  brush,  and  generally  keep  himself  tidy.  He 
should  have  at  least  a  grammar  school  education,  be  a  fair 
penman,  and  have  an  aptitude  for  bank  work.  This  can  soon 
be  determined,  for  if  he  is  a  round  boy  in  a  square  hole,  you 
don't  want  him.  He  must  fit. 

To  say  that  the  messenger  must  be  honest  is  to  waste 
time.  All  men  should  be;  but  honesty  being  sometimes  an 
ethical  conclusion,  what  is  honesty  is  often  a  matter  of  dis- 
pute. He  should  have  a  high  regard  for  other  people's 


166 


THE   PRACTICAL  WORK  OF   A   BANK 


property.  It  is  told  of  a  certain  bank  clerk  that  the  mere 
sight  of  money  in  mass  sets  him  trembling.  Such  a  man  is 
not  safe  in  a  bank.  The  boy  who  would  take  a  postage 
stamp  without  consent  is  treading  dangerous  ground.  He 
may  never  go  further,  and  yet  he  may  not  be  satisfied  with 
postage  stamps,  and  the  environment  of  money,  the  ease 
with  which  the  officials  earn  it  might  tempt  him  to  find  a 
way  or  make  one,  and  the  old  story  repeats  itself.* 


THE  MESSENGEB  AND  His  VALUABLES 


The  messenger  should  early  learn  to  comprehend  the 
value  of  the  paper  he  will  carry  with  him.     He  must  be 


DO  NOT  HOLD  THIS  DRAFT 
FOR  CONVENIENCE  OF  DRAWEE. 

IF  NOT  PAID  ON  PRESENTA- 
TION RETURN  AT  ONCE  WITH 
REASON  TO 

MANUFACTURERS  NATIONAL  BANK 
PHILADELPHIA,  PA. 


DEJIAXD   DRAFT 


careful.  He  will  take  out  with  him  checks,  notes,  bills  of 
exchange,  securities,  coupons  and  all  sorts  of  valuable 
papers,  for  which  he  must  account,  and  if  no  monetary  loss 
occurs,  it  will  be  difficult  and  sometimes  impossible  to  re- 
place them  if  lost.  He  is,  therefore,  usually  provided  with 
a  stout  wallet,  with  a  good  clasp,  and  with  a  chain  encased  in 
leather  which  goes  around  the  body  or  wrist,  to  prevent  loss 
or  robbery.  He  should  use  it  that  way;  but  many  messen- 
gers have,  after  a  time,  grown  careless  in  such  matters  and 
taken  long  chances. 

;  To  repeat,  the  messenger's  principal  duties  consist  in 
doing  as  he  is  told.  He  should  not  assume  responsibilities. 
He  should  be  sent  out  with  explicit  instructions  as  what  to 

*The  writer  employed  a  messenger  a  short  time  ago  who  stole  the  first  money 
he  could  lay  his  hands  on. 


COLLECTIONS    AND    THE    MESSENGER  167 

do  and  be  held  to  them.  He  should  not  take  in  payment  of 
items  anything  but  cash  or  certified  checks.  While  the 
course  of  business  runs  smoothly,  it  may  make  little  differ- 
ence whether  a  New  York  draft,  a  check  or  currency  is  re- 
ceived in  payment,  either  by  a  messenger  or  by  a  collecting 
bank;  but  in  the  event  of  failure  of  the  bank  making  the 
collection,  or  the  bank  on  which  the  instrument  received  in 
payment  is  drawn,  questions  of  law  arise  that  the  collecting 
bank  is  bound  to  know.  To  discuss  the  question  here  would 
lead  to  endless  quotations  from  courts  of  record  all  over  the 
country  and  the  reader  interested  in  following  this  subject 
further  is  referred  to  works  on  banking  law  and  legal  publi- 
cations that  treat  of  such  matters  from  a  strictly  legal  view- 
point. 

OLD  EMPLOYEES 

The  messenger  is  sometimes  an  old  employee  who  has 
served  his  day  at  high  pressure  work  and  been  given  the 
rather  simple  occupation  of  messenger;  or  from  disappoint- 
ment or  incompetency  in  the  field  of  other  endeavor  has 
become,  for  some  reason  or  other,  incapacitated  for  higher 
grade  work  and  taken  this  as  a  last  resort.  Some  of  the 
tragedies  of  banking  have  culminated  in  the  messenger,  and 
if  we  could  scratch  beneath  the  surface — cut  deep  enough — 
we  would  find  many  a  broken-hearted  man  under  the 
messenger's  coat. 

In  a  large  city,  where  much  territory  has  to  be  covered, 
there  will,  of  course,  be  various  routes  laid  out,  covering  the 
maximum  ground  with  the  least  waste  of  time  and  retracing 
of  steps.  Inasmuch  as  banks  have  to  present  various  items 
not  handled  through  the  clearing-house  over  the  counters 
direct,  these  routes  are  often  laid  out  with  respect  to  cover- 
ing the  various  banking  institutions  of  the  city,  and  as  occa- 
sion requires  the  route  is  varied  to  include  other  places. 

MEETING  MEN 

In  making  collections  the  messenger  will  meet  all  sorts 
of  men,  in  all  sorts  of  occupations,  and  receive  all  sorts  of 
treatment,  but  it  is  a  good  schooling — this  meeting  of  men 
— and  chapters  might  be  written  thereon;  and  those  inter- 


168  THE    PRACTICAL  WORK   OF   A   BANK 

ested  in  the  anecdotal  side  of  this  question  will  find  many 
incidents  mentioned  in  the  chapter  on  the  messenger  in 
Patten's  Practical  Banking. 

THE  MESSENGER  MUST  ACCOUNT 

The  messenger  is  charged  with  the  items  taken  out,  or 
memo  made  against  them  of  when  and  by  whom  taken,  and 
must  account  for  the  paper  or  turn  in  its  proceeds  when  his 
trip  is  ended.  Messengers  have  gone  out  with  a  batch  of 
collections  and  never  returned,  and  it  is  proper  to  have  some 
record  of  what  was  taken  out  so  that  in  case  of  loss,  acci- 
dent or  other  contingency  there  will  be  a  record  of  what 
was  taken  away.  When  carrying  large  amounts  of  cash  or 


19L. 


HO. 

RECORD  OF   ITEMS  TAKEN   OUT  BY    MESSENGER 

valuables  of  any  sort,  the  messenger  is  usually  accompanied 
by  another  clerk.  In  some  banks,  especially  in  the  smaller 
places,  the  janitor  acts  as  messenger.  Where  clearings  are 
made  over  the  counter,  the  messenger  is  often  the  agency  by 
which  this  is  done. 

KNOWLEDGE  OF  BANKING  LAW  ESSENTIAL  IN  COLLECTIONS 

A  knowledge  of  banking  law  and  especially  the  law  of 
negotiable  instruments  is  indispensable  to  the  one  in  charge 
of  the  messenger.  He  must  know  what  is  a  regular  instru- 
ment and  what  irregular;  what  responsibility  he  assumes 
for  his  bank  in  the  doing  of  certain  things  and  what  he 
should  do  to  protect  his  bank  under  certain  conditions.  He 
may  decide  to  send  an  item  direct  to  the  drawee  bank  when 


COLLECTIONS    AND    THE    MESSENGER 


169 


Guaranty  Trust  Company  of  New  York 

140  Broadway 


M ... 


..—.drawn  by 


A ' IJLbr|__ 

>    **    i£ 
(<._..« §jas  been  regularly  presented  at  your  office 

5    o    o 
for  payment.    It  will  be  held  by  Collection  Jgpa^megi  until  3  o'clock  this  day. 

WM.  C.  EDWARDS,  Treasurer. 

o    w 


New  York 


by.— 


KOTICE    LEFT  BY   MESSENGER  WHEN    DRAWEE    IS    NOT  FOUND 

another  bank  is  in  existence  in  the  same  town,  and  not  know- 
ing the  law  involve  his  bank  in  loss. 

He  can  make  no  better  use  of  his  spare  time  than  to 
study  case  law  ;  for  what  happened  in  one  bank  may  happen 
in  another;  and  case  law  being  simply  the  result  of  errors 
made,  he  can  avoid  the  same  errors  by  knowing  the  result 
of  other  like  errors.  By  being  a  thoughtful  collection  man 
he  can  not  only  make  money  for  his  bank,  but  save  money 
for  it,  and  it  is  as  important  to  avoid  losses  as  it  is  to  make 
profits. 

A  LITTIJE  or  THE  LAW  OF  COLLECTIONS 

The  collection  of  a  note  is  governed  by  law  so  strict  that 
careful  attention  must  be  given  the  timing,  the  presentation, 
the  protest  and  the  notice  of  protest,  and  the  form  of  money 
that  is  accepted  in  payment.  The  law  does  not  recognize 


^ 


DO    HOT    PROTCiT    THIS    1TTN. 


Plan  main  this  slip  from  tkt  item  before  it 
is  pnstnttd  for  payminl. 


If  not  paid,-  return  «t  enc«,  with  rcuoo,  to 

THE  CLEARFIELD  NATIONAL  BANK. 

CLEARFIELO.  PA. 


TIME    DRAFT   "NO   PROTEST" 


170  THE   PRACTICAL  WORK  OF   A   BANK 

payment  in  any  other  form  than  cash,  but  the  custom  among 
the  New  York  banks  is  to  accept  a  certified  check  on  a 
clearing-house  bank  drawn  to  the  order  of  the  collecting 
bank;  or  if  drawn  to  a  third  party  and  duly  indorsed,  the 
indorsement  must  be  known  to  the  bank  which  accepts  it. 

Briefly  stated,  the  law  in  regard  to  presentation  is  that 
a  note  must  be  presented  at  the  place  where  it  is  made  pay- 
able, if  such  a  place  is  named.  If  not  stated,  at  the  maker's 
place  of  business,  if  known,  or  at  his  residence  or  at  any 
place  where  he  may  be  found  on  the  day  of  maturity.  Bank- 
ing customs  make  the  hours  from  10  A.  M.  to  3  P.  M.,  but 
it  is  often  very  convenient  to  fall  back  on  the  law  which 
permits  the  presentation  at  a  later  hour  when  the  occasion 
requires.  In  protesting  a  note  which  bears  an  indorser  it  is 
absolutely  necessary  that  it  be  presented  by  a  notary  pub- 
lic of  record  on  the  day  the  note  falls  due,  and  that  notices 
of  such  protest  be  sent  to  all  parties  concerned  and  such  no- 
tices must  be  mailed  by  an  early  mail  on  the  day  following. 
This  protest  holds  all  the  indorsers  in  turn,  but  it  is  not 
necessary  to  protest  to  hold  the  maker,  although  it  is  best 
to  have  a  note  protested,  as  it  is  a  sworn  statement  beyond 
dispute  in  case  of  a  suit  that  the  note  was  presented  and 
refused  at  the  place  of  payment  on  the  due  date. 

By  the  Negotiable  Instruments  Law  in  force  in  forty - 
six  States  and  territories,  protest  is  necessary  only  on  for- 
eign bills  of  exchange — checks,  notes  and  bills  drawn  in  one 
State  and  payable  in  another;  but  as  a  common  banking 
practice  protest  is  made  of  all  instruments  that  are  not  paid. 

The  purpose  of  protest  is  to  hold  the  indorsers,  for  un- 
less protest  is  properly  made  the  indorsers  are  discharged. 
And  when  properly  protested  the  paper  needs  no  other  evi- 
dence in  court  as  to  having  been  presented  for  payment.  To 
be  on  the  safe  side  some  banks  protest  all  paper  that  is  un- 
paid, unless  specifically  instructed  to  the  contrary.  But  be- 
fore protest  is  made,  all  due  effort  should  be  made  to  reach 
the  party  on  whom  drawn  and  be  certain  that  payment  has 
been  refused  before  resorting  to  protest.  Protest  of  checks 
is,  of  course,  a  common  matter,  and  presentment  to  the 
bank  drawn  on  and  refusal  to  pay  is  all  that  is  necessary  to 
make  protest  warranted. 


COLLECTIONS    AND    THE    MESSENGER  171 

SENDING  COLLECTIONS  DIRECTLY  TO  DRAWEE  BANKS1 

1.  Collecting  Bank  Guilty  of  Negligence  in  Sending 
Check  to  Drawee. — In  the  collection  of  checks  deposited 
with  it  a  bank  frequently  finds  it  convenient,  if  not  neces- 
sary, to  send  them  directly  to  the  banks  on  which  they  are 
drawn.  The  collecting  bank  may  have  no  correspondent  at 
the  place  where  the  drawee  of  a  check,  deposited  with  it  for 
collection,  is  located.  The  drawee  bank  may,  in  fact,  be  the 
only  bank  at  that  place.  The  collection  of  a  check  through 
the  medium  of  intermediate  or  correspondent  banks  might 
involve  sending  the  check  over  a  circuitous  course,  which, 
in  addition  to  consuming  time  might  actually  jeopardize  the 
chances  of  successful  collection.  Exchange  charges  some- 
times influence  the  bank  as  to  the  manner  in  which  the  col- 
lection is  conducted.  These  and  other  considerations,  in  the 
eyes  of  the  banker,  are  often  deemed  sufficient  reason  for  col- 
lecting a  check,  placed  with  him  by  a  depositor,  by  sending 
the  check  directly  to  the  drawee  bank. 

There  are  undoubtedly  many  instances  in  which  a  bank- 
er would  consider  any  other  method  of  collection  opposed 
to  good  banking.  But,  in  the  making  of  such  collections, 
the  banker  must  take  into  consideration  the  fact  that  the 
courts  have  evolved  certain  rules  of  law,  by  which  to  deter- 
mine who  shall  bear  the  loss,  when  a  loss  occurs  in  the  col- 
lection of  a  check.  And  these  rules  sometimes  conflict  with 
the  banker's  idea  of  the  proper  way  to  collect  a  check. 

The  courts  lay  down  the  rule  that,  where  a  bank  receives 
a  check  for  collection,  and  through  its  negligence  the  check 
is  not  collected,  it  is  responsible  for  the  amount  of  the  loss 
to  the  owner  of  the  check.  No  one  can  doubt  the  sound- 
ness of  this  doctrine.  The  courts  go  further  and  declare 
that  the  sending  of  a  check  by  a  collecting  bank  directly  to 
the  bank  on  which  it  is  drawn  amounts  to  negligence  and 
renders  the  collecting  bank  liable  to  its  depositor  in  the  event 
that  the  collection  is  not  made.  Bankers  may  doubt  the 
fairness,  as  well  as  the  soundness,  of  this  doctrine.  But  the 
rule  is  so  well  established  in  this  country  that  time  spent  in 
doubting  it  in  any  manner  is  wasted. 

With  the  exception  of  New  York,  every  State  in  which 
the  question  has  arisen  has  held  that  the  sending  of  a  check 

iJohn  Edson  Brady  in  the  April,  1914,  Banking  Law  Journal. 


172  THE    PRACTICAL  WORK   OF    A   BANK 

directly  to  the  drawee  bank  is  negligence  on  the  part  of  the 
collecting  bank.  As  the  courts  see  the  situation,  the  loss  in 
such  a  case  usually  occurs  because  the  drawee  bank  sends  its 
own  paper  in  payment  of  the  check  and  fails  before  the 


Please  advise   payment  or   non-pay- 
ment  by   telegrapfy, 


as    soon,    as    paid    or    refused  —  to 
Bank   of   Montclair, 

MONTCLA1R.    N.   J. 


ITEM   FOR  COLLECTION    WITH    INSTRUCTIONS  TO  "WIRE    NON-PAYMENT" 

same  is  presented  for  payment;  if  the  check  had  been  sent 
to  a  correspondent  bank,  it  might  have  been  presented  be- 
fore the  failure  of  the  drawee,  paid  in  cash,  and  remitted  for 
by  the  correspondent.  It  matters  not  that  loss  might  also 
occur,  even  by  making  the  collection  through  a  correspond- 
ent; this  does  not  enter  into  the  question. 

The  rule,  which  makes  it  negligent  for  a  collecting  bank 
to  send  a  check  directly  to  the  bank  on  which  it  is  drawn,  is 
generally  placed  on  the  ground  that,  in  so  doing,  the  collect- 
ing bank  makes  the  debtor  an  agent  for  the  purpose  of  col- 
lecting the  debt. 

The  reason  is  expressed  as  follows  in  the  case  of  German 
National  Bank  v.  Burns,  12  Colo.  539:  "Even  if  we  can 
conceive  of  such  an  anomaly  as  one  bank  acting  as  the  agent 
of  another  to  make  a  collection  against  itself,  it  must  be 
apparent  that  the  selection  of  such  an  agent  is  not  sanc- 
tioned by  businesslike  prudence  and  discretion.  How  can 
the  debtor  be  the  proper  agent  of  the  creditor  in  the  very 
matter  of  collecting  the  debt?  His  interests  are  all  adverse 
to  those  of  the  principal.  If  the  debtor  is  embarrassed, 
there  is  the  temptation  to  dela)^;  if  wanting  in  integrity, 
there  is  the  opportunity  to  destroy  and  deny  the  evidence  of 
the  indebtedness." 


COLLECTIONS    AND    THE    MESSENGER  178 

The  following  cases  support  the  rule  that  it  is  negligence 
for  a  bank  to  send  a  check,  entrusted  to  it  for  collection,  di- 
rectly to  the  drawee  and  indicate  how  firmly  the  rule  is 
fixed:  Lowenstein  v.  Bresler,  109  Ala.  326;  German  Na- 
tional Bank  v.  Burns,  12  Colo.  539;  Drovers'  National 
Bank  v.  Anglo-American  Packing  and  Provisions  Com- 
pany, 117  111.  100;  Anderson  v.  Rodgers,  53  Kans.  542; 
First  National  Bank  v.  Citizens'  Savings  Bank,  123  Mich. 
336;  Minneapolis  Sash  and  Door  Company  v.  Metropolitan 
Bank,  76  Minn.  136;  American  Exchange  National  Bank 
v.  Metropolitan  National  Bank,  71  Mo.  App.  451 ;  Western 
Wheeled  Scraper  Company  v.  Sadilek,  50  Neb.  105;  Na- 
tional Bank  v.  Johnson,  6  N.  D.  180;  Wagner  v.  Crook, 
167  Pa.  259;  Hazlett  v.  Commercial  National  Bank,  132 
Pa.  118;  Harvey  v.  Girard  National  Bank,  119  Pa.  212; 
Merchants'  National  Bank  v.  Goodman,  109  Pa.  422 ;  Givan 
v.  Bank  of  Alexandria,  Tenn.,  52  S.  W.  Rep.  923;  Win- 
chester Milling  Company  v.  Bank  of  Winchester,  120  Tenn. 
225;  First  National  Bank  v.  City  National  Bank,  12  Tex. 
Civ.  App.  318;  First  National  Bank  v.  Fourth  National 
Bank,  56  Fed.  Rep.  967;  Farwell  v.  Curtis,  7  Biss.  160, 
Fed.  Cas.  No.  4,  690;  Jefferson  County  Savings  Bank  v. 
Hendrix,  147  Ala.  670,  1  L.  R.  A.,  N.  S.,  246;  Farley  Na- 
tional Bank  v.  Pollak  &  Bernheimer,  145  Ala.  321 ;  Carson 
v.  Fincher,  129  Mich.  687;  Bank  of  Rocky  Mount  v.  Floyd, 
142  N.  C.  187. 

In  some  of  the  cases  the  bank  in  which  a  check  is  de- 


NO  PROTEST. 


Kindly 


THE  FARMERS  NATIONAL  BANK, 
Rome,  N.  Y. 


PEOMI3SOEY    NOTE,   IK    PROCESS   OF    COLLECTION 


174  THE    PRACTICAL   WORK   OF   A   BANK 

posited  for  collection  escapes  liability  to  the  depositor  for  a 
loss  resulting  from  sending  the  check  directly  to  the  drawee 
bank,  by  reason  of  another  bank  intervening  between  it  and 
the  drawee.  That  is,  the  initial  bank,  instead  of  mailing  the 
check  to  the  drawee,  forwards  it  to  a  suitable  correspondent 
bank,  which  in  turn  sends  it  to  the  drawee.  The  corre- 
spondent bank  is  then  held  to  be  the  agent  of  the  depositor 
and  not  of  the  forwarding  bank,  and  the  latter  is  not  re- 
sponsible for  the  default  of  the  correspondent.  Givan  v. 
Bank  of  Alexandria,  Tenn.,  52  S.  W.  Rep.  923,  is  a  case 
of  this  kind.  The  plaintiff  deposited  in  the  defendant  bank 
two  checks  on  the  bank  of  A.  Byram  &  Company,  of  Water- 
town,  Tenn.  On  the  same  day  the  defendant  bank  for- 
warded the  checks  to  the  First  National  Bank  at  Nash- 
ville. This  bank  sent  the  checks  directly  to  the  drawee  bank, 
but  they  were  never  paid,  because  of  the  drawee's  suspen- 
sion. 

Although  the  court  stated  that  the  Nashville  bank  was 
guilty  of  negligence  in  sending  the  checks  directly  to  the 
drawee,  it  was  held  that  the  defendant  bank  was  not  liable 
for  that  default.  The  court  said:  "Assuming,  then,  that  un- 
der the  rules  stated  the  check  may  be  sent  to  the  place  of 
payment  through  intermediate  banks,  it  follows,  under  the 
rule,  that  the  initial  bank  discharges  its  duty  to  the  person 
who  deposits  the  check  for  collection  if  such  intermediate 
bank  or  banks  are  suitable  persons  for  the  performance  of 
the  business;  and,  in  event  such  proper  selections  are  made, 
such  intermediate  bank  or  banks,  down  to  the  last  one  in  the 
chain,  become  the  agents  of  the  owner  of  the  paper,  and  re- 
sponsible to  him  as  such." 

Many  of  the  States  hold,  contrary  to  the  rule  here  ex- 
pressed, that  the  initial  bank  is  liable  to  its  depositor  for 
losses  occurring  through  the  negligence  or  default  of  a  cor- 
respondent bank,  to  which  a  check  is  sent  for  collection. 

2.  The  Rule  in  New  York.— The  State  of  New  York 
stands  alone  in  this  country  in  its  opposition  to  the  general 
rule,  under  which  a  bank  is  deemed  guilty  of  negligence  in 
sending  a  check  directly  to  the  bank  on  which  it  is  drawn. 
But  even  in  New  York  there  is  no  decision  of  the  highest 
court,  deciding  the  question  squarely. 

The  case  of  Mclntosh  v.  Tyler,  47  Hun  (N.  Y.)  99, 
was  an  action  by  the  payee  of  a  check  against  its  drawers. 


COLLECTIONS    AND    THE    MESSENGER  175 

The  check  was  deposited  by  the  plaintiff  in  a  bank  for  col- 
lection, and  the  bank  in  which  it  was  so  deposited  sent  it 
directly  to  the  bank  on  which  it  was  drawn.  The  drawee 
bank  charged  the  check  to  the  drawer's  account  and  stamped 
it  paid.  A  draft  on  New  York  for  the  amount  of  the  check 
was  filled  out,  but  was  not  signed  and  was  subsequently  de- 
stroyed. At  the  close  of  the  day  on  which  the  drawee  bank 
received  the  check  it  suspended  business.  It  was  held  that 
the  drawer  was  liable  to  the  payee  on  the  check,  the  court 
saying:  "The  fact  that  a  check  mailed  by  the  holder  to  the 
drawee  for  payment  is  not  paid,  when  it  would  have  been 
had  it  been  presented  at  the  payee's  counter,  is  not,  it  seems, 
in  this  State,  a  defense  in  favor  of  the  drawer,  though  by  the 
transaction  the  drawer  lost  his  deposit,  though  it  has  been 
held  otherwise." 

While  this  was  an  action  against  the  drawer  of  the  check, 
brought  by  the  payee,  and  not  by  the  holder  against  a  bank 
in  which  the  check  was  deposited  for  collection,  it  has  been 
generally  accepted  as  an  authority  for  the  proposition  that  a 
bank  in  which  a  check  is  deposited  for  collection  is  not 
guilty  of  negligence  in  forwarding  the  check  directly  to  the 
drawee  for  payment,  and  is  not  liable  to  the  holder,  by  whom 
the  check  was  deposited,  for  a  loss  occurring  therefrom. 

This  New  York  decision  is  based  on  the  authority  of  two 
earlier  New  York  cases,  Indig  v.  National  City  Bank,  80 
N.  Y.  100,  and  Briggs  v.  Central  National  Bank,  89  N.  Y. 
182.  Referring  to  these  cases  it  is  said  in  a  note  in  27  L.  R. 
A.  248:  "Careful  analysis  of  these  New  York  cases,  there- 
fore, shows  that  there  is  no  direct  decision  of  the  court  of 
last  resort,  upholding  the  practice  of  mailing  checks  directly 
to  the  drawee.  On  the  contrary,  there  is  a  mere  expression 
not  necessary  to  the  decision  in  the  Indig  case  approving 
the  practice  of  mailing  a  note  to  the  bank  at  which  it  is  pay- 
able, and  a  recital  of  this  decision  in  the  case  of  Briggs  v. 
Central  National  Bank,  89  N.  Y.  182,  as  if  it  were  the  case 
of  a  check  mailed  to  the  drawee.  Therefore  the  decision  of 
the  general  term  of  the  supreme  court  (Mclntosh  v.  Tyler, 
supra)  denying  the  doctrine  of  the  other  States  in  reliance 
on  the  authority  of  these  two  cases  is  in  itself  the  only  direct 
authority  in  New  York  State  to  that  effect.  This  decision 
itself  is  weakened  by  the  fact  that  it  is  based  on  cases  which 
do  not  exactly  support  it." 

12 


176 


THE    PRACTICAL   WORK  OF   A   BANK 


3.  Where  There  is  No  Other  Bank  in  Town  Where 
Drawee  is  Located.  —  What  is  a  bank  to  do  when  it  receives 
for  collection  a  check  drawn  on  a  bank  where  there  is  no 
other  bank  in  the  same  town?  The  law  leaves  the  bank  no 
alternative  but  to  collect  the  check  through  the  medium  of 
an  express  company,  if  it  has  an  agency  at  that  point,  or 
send  a  special  messenger  with  instructions  to  collect  the 
check  in  cash  over  the  drawee's  counter.  Possibly  the 
best  plan  would  be  to  enter  into  an  express  agreement 
with  the  depositor  of  the  check,  giving  the  bank  authority 


First  -National  Bank, 

Norwich.  Conn. 


Siitrtag  SnB.&r. 


tk  iKttMS 


NOTE    RETURNED    UNPAID REASOX     CHECKED 

to  send  the  check  to  the  drawee  direct,  and  releasing  it  from 
any  liability  for  loss  resulting  therefrom.  At  any  rate,  if 
the  bank  sends  the  check  directly  to  the  drawee,  without  ex- 
press instructions  to  do  so,  it  is  guilty  of  negligence,  just  as 
it  would  be  in  a  case  where  there  is  more  than  one  bank  in 
the  town  in  which  the  drawee  is  located. 

Some  of  the  writers  on  this  branch  of  the  law  have  ex- 
pressed the  opinion  that  there  is  an  exception  to  the  general 
rule  in  the  case  where  the  drawee  is  the  only  banlpng  in- 
stitution in  its  town,  but  no  support  for  this  view  is  found 
in  the  authorities. 

The  case  of  Minneapolis  Sash  and  Door  Company  v. 
Metropolitan  Bank,  76  Minn.  136,  involved  a  check  drawn 
on  the  only  bank  in  a  certain  town.  On  the  trial  the  plain- 
tiff was  allowed  to  show  that  it  was  usual  and  customary  for 
banks  to  send  checks  and  drafts,  payable  by  other  banks  at 


COLLECTIONS    AND    THE    MESSENGER  177 

distant  points,  directly  to  the  drawee  by  mail,  provided  there 
was  no  other  bank  of  good  standing  in  the  same  town. 

In  the  opinion  it  was  said:  "We  fail  to  see  what  possi- 
ble effect  upon  a  case  of  this  kind  the  fact  that  the  drawee 
is  the  only  bank  in  good  standing  in  the  town  can  have  upon 
the  duty  of  a  bank  which  undertakes  a  collection.  Any  rea- 
son for  such  a  course  is  equally  as  sound  where  there  are 
two  or  more  banks  in  the  town  as  where  there  happens  to 
be  but  one.  *  *  *  We  cannot  agree  with  counsel  that  the 
usage  and  custom  here  relied  upon  is  a  defense  to  the  claim 
that  the  defendant  was  negligent  when  forwarding  the  check 
to  the  Mapleton  Bank  (drawee)  for  presentation  and  pay- 
ment. As  a  general  rule  usage  and  custom  will  not  justify 
negligence.  It  may  be  admitted  that  such  a  course  is  fre- 
quently adopted,  but  it  must  be  at  the  risk  of  the  sender, 
who  transmits  the  evidence  of  indebtedness  upon  which  the 
right  to  demand  payment  depends,  to  the  party  who  is  to 
make  the  payment.  Such  a  usage  and  custom  is  opposed 
to  the  policy  of  the  law,  and  is  unreasonable  and  invalid." 

Another  such  case  is  Pinkney  v.  Kanawha  Valley  Bank, 
68  W.  Va.  254.  It  there  appeared  that,  on  September  25, 
1900,  the  plaintiff  Pinkney  received  a  check,  payable  to  his 
order,  which  he  deposited  in  the  defendant  bank  for  collec- 
tion. The  drawee  of  this  check  was  the  only  banking  insti- 
tution located  at  that  point.  On  the  following  day  the  de- 
fendant sent  the  check  to  the  drawee  by  mail,  with  instruc- 
tions to  ship  the  amount,  for  which  it  was  drawn,  in  cur- 
rency. The  currency  was  not  shipped  and  the  drawee  bank 
subsequently  closed  for  good. 

In  its  defense  the  defendant  bank  claimed  that,  under 
the  circumstances,  and  in  view  of  the  fact  that  there  was  no 
other  bank  at  the  place  where  the  drawee  bank  was  located, 
it  was  not  negligent  in  sending  the  check  directly  to  the 
drawee.  It  was  argued  that,  as  the  plaintiff  had  been  a 
customer  of  the  defendant  bank  for  years,  and  accustomed 
to  do  business  in  Charleston,  where  the  defendant  bank  was 
located,  and,  as  he  lived  at  Montgomery,  where  the  drawee 
bank  was  located,  and  knew  that  the  drawee  was  the  only 
bank  at  that  point,  he  was  chargeable  with  knowledge  of 
the  custom  on  the  part  of  the  bank  to  send  such  checks 
directly  to  the  drawee,  and  was  bound  thereby.  The  court, 
however,  held  that  an  exception  to  the  general  rule,  which 


178  .      THE    PRACTICAL   WORK  OF   A   BANK 

makes  it  negligence  to  send  a  check  directly  to  the  drawee,  to 
be  applied  in  cases  where  there  is  no  other  bank  at  the  place 
where  the  drawee  is  located,  is  contrary  to  the  weight  of 
authority  and  reason. 

The  defendant  in  Wilson  v.  Carlinville  National  Bank, 
187  111.  222,  was  a  depositor  in  the  plaintiff  bank  and  the 
action  was  brought  to  recover  the  amount  of  a  check  which 
he  had  deposited  and  which  he  had  been  allowed  to  draw 
against,  the  check  being  afterwards  dishonored.  The  facts 
concerning  the  collection  were  these:  On  June  1st,  1893, 


CASH  lit*.  NO  PROTEST. 


Kindly   remove  thU   slip    before   presenting  item. 
If  not  paid  five  reason. 


COWLJTZ  COUNTY  BANK, 
5  Kalama,  Wash. 


CASH   ITEM   WITH    "NO  PROTEST"  SLIP   ATTACHED 

r 

the  defendant  deposited  in  the  plaintiff  bank  a  check  for 
$300,  drawn  on  the  Citizens'  Bank  of  Gillespie,  Gillespie 
being  a  nearby  town.  The  amount  was  subsequently  with- 
drawn by  the  defendant.  On  the  day  of  receipt  the  check 
was  sent  to  the  plaintiff's  St.  Louis  correspondent.  That 
bank  sent  it  to  a  Chicago  bank  which  sent  it  directly  to  the 
drawee,  by  which  it  was  received  on  June  5th.  On  the  7th 
the  drawee  sent  its  draft  on  St.  Louis  for  the  amount  of 
the  check,  but  payment  of  the  draft  was  refused  because 
of  the  failure  of  the  Gillespie  bank  on  the  8th.  Illinois  is 
one  of  the  States  which  holds  that  a  bank  in  which  a  check 
is  deposited  for  collection  is  not  liable  to  the  depositor  for 
the  default  of  a  correspondent  bank,  where  it  uses  due  care 
in  '.  the  forwarding  of  the  check  and  in  the  selection  of  a 
bank  to  handle  the  collection.  The  defendant  contended 
that,  if  the  plaintiff  bank  knew  that  its  correspondent,  by 
itself  or  through  another  bank,  would  send  the  check  direct- 
ly to  the  drawee,  which  it  appears  was  the  only  bank  at  that 


COLLECTIONS    AND    THE    MESSENGER  179 

point,  then  the  plaintiff  did  not  act  with  reasonable  care  in 
the  selection  of  its  correspondent  and  should  bear  the  loss. 

It  was  held,  however,  that  since  the  depositor  was  aware 
of  the  fact  that  the  drawee  was  the  only  bank  at  Gillespie  he 
was  estopped  from  claiming  that  the  plaintiff  was  negli- 
gent in  sending  the  check  forward  for  collection  in  accord- 
ance with  the  custom  in  such  cases.  The  reasons  are  found 
in  the  following  statement  taken  from  the  opinion:  "The 
evidence  further  sufficiently  established  that  appellant  (de- 
positor) knew  there  was  but  one  bank  in  Gillespie,  namely, 
the  Citizens'  Bank,  upon  which  the  check  he  held  was  drawn. 
It  was  also  shown  by  the  proofs  that  the  appellant  had,  on 
prior  occasions,  deposited  with  the  appellee  bank  (plaintiff) 
other  checks  on  out-of-town  banks,  and  availed  himself  of 
the  facilities  offered  by  the  system  adopted  and  in  vogue 
only  among  banks  and  bankers  for  the  collection  of  that 
class  of  paper.  He  may  not  have  known  the  details  of  the 
system  or  custom  in  force  among  banks  for  the  collection  of 
such  checks,  but  he  knew  the  collection  was  to  be  made, 
without  expense  to  him,  through  banks  cooperating  togeth- 
er, in  compliance  with  certain  usages  and  customs  existing 
between  such  institutions  to  enable  such  collections  to  be  so 
made.  He  knew  there  was  but  one  bank  in  Gillespie,  and 
that  the  one  on  which  the  check  was  drawn.  The  coopera- 
tion of  that  bank  was  essential  to  the  operation  of  the  mode 
of  collection  of  the  check;  for  there  was  no  other  bank  at 
Gillespie  to  act  in  the  matter.  With  this  knowledge  the 
appellant  accepted  the  benefit  of  the  facilities  for  the  collec- 
tion of  his  check  which  the  banks  held  out  to  their  customers. 
The  usages  and  customs  thus  availed  of  by  appellant  con- 
templated the  sending  of  the  check  directly  to  the  bank  on 
which  it  was  drawn,  there  being  no  other  bank  at  that  point. 
The  appellant  having  knowledge  that  there  was  but  one 
bank  at  Gillespie,  and  that  his  check  was  to  be  collected 
without  cost  or  expense  to  him,  through  the  medium  of  busi- 
ness usages  and  customs  in  force  only  between  banks  and 
bankers,  could  not  be  permitted  to  accept  the  facilities  thus 
afforded  by  the  appellee  bank  for  his  accommodation,  and 
afterwards  insist  that  compliance  by  the  appellee  bank  with 
the  usages  and  customs,  the  benefit  whereof  he  sought  to 
avail  himself  of,  should  constitute  actionable  negligence." 

This  case  is,  therefore,  not  a  direct  authority  for  the 


180 


THE    PRACTICAL  WORK  OF   A   BANK 


SIGHT  DRAFT   RETURNED    UNPAID    WITH    REASOX    INDICATED 

proposition  that  a  bank,  in  which  a  check  is  deposited  for 
collection,  may  forward  the  check  directly  to  the  drawee,  if 
it  appears  that  the  drawee  was  the  only  bank  at  that  place. 
It  holds  merely  that  the  bank,  in  which  the  check  is  deposit- 
ed, is  not  liable  to  the  depositor,  where  it  sends  the  check  to  a 
correspondent  bank,  by  which  it  is  forwarded  to  the  drawee 
bank,  in  a  case  where  it  is  shown  that  the  depositor  knew 
that  there  was  no  other  bank  at  the  place  where  the  drawee 
is  located  and  was  aware  of  the  fact  that  the  check  would 


Returned  to  No , by 

Guaranty  Trust  Co.  of  New  York 

FOR  REASON  MARKED     X          X 


Guarantee  of  Endorsement 

Pilling 

Signature  Incorrect 

Endorsement  of  each  Payee 

Signature  Missing 

Missing  Endorsement 

Sent  Wrong 


Date 

Guarantee  of  Amount 

No  Account 

Insufficient  Funds 

Account  Closed 

Written  Official  Endosement 

Bank  Stamp 


SLIP   ATTACHED   TO    RETURNED    ITEMS    GIVING  REASON    FOR    THE    RETURN 


COLLECTIONS    AND    THE    MESSENGER  181 

be  collected  without  expense  to  him  through  other  banks  in 
accordance  with  banking  usages. 

Where  the  depositor  assents  to  the  sending  of  the  check 
straight  to  the  drawee,  the  bank  will  not  be  held  liable.  The 
plaintiff  bank,  in  the  case  of  First  National  Bank  v.  Citi- 
zens' Savings  Bank,  323  Mich.  336,  sent  to  the  defendant 
bank  for  collection  a  certificate  of  deposit,  issued  by  D.  F. 
Parsons,  a  private  banker  at  Burr  Oak,  Mich.  The  certifi- 
cate was  accompanied  by  the  following  letter:  "We  send 
this  C-D  for  $165,000  and  int.  to  you  for  collection,  as  we 
note  that  you  have  a  correspondent  at  Burr  Oak,  Mich. 
Please  collect  for  us  at  your  best  rate  of  exchange  and 
oblige."  The  defendant's  correspondent  was  the  banker  by 
whom  the  certificate  was  issued,  and  as  there  was  no  other 
bank  or  banker  at  Burr  Oak,  the  certificate  was  forwarded 
to  him  direct.  The  certificate  was  not  collected,  owing  to 
Parsons'  failure  after  the  receipt  of  the  certificate  by  him. 
It  was  held  that  the  letter  sent  to  the  defendant  by  the 
plaintiff,  along  with  the  certificate  of  deposit,  was  equiva- 
lent to  an  instruction  to  send  the  certificate  directly  to 
Parsons. 

4.  Effect  of  Custom  to  Send  Checks  Direct  to  Drawee 
Banks. — Custom  will  sometimes  sanction  a  practice  which 
would  otherwise  be  declared  invalid.  But  the  fact  that  it  is 
customary  to  send  checks  directly  to  a  drawee  bank  for  col- 
lection does  not  render  such  practice  proper  in  the  eyes  of 
the  law.  The  question  was  raised  in  the  case  of  Farley  Na- 
tional Bank  v.  Pollak  &  Bernheimer,  145  Ala.  321.  The 
plaintiffs  deposited  a  check  for  collection  and  the  bank  in 
which  it  was  deposited  forwarded  it  directly  to  the  drawee, 
which  sent  back  a  draft  on  New  York  for  the  amount  of 
the  check.  The  draft  was  not  paid  on  presentment  because 
of  the  failure  in  the  meantime  of  the  bank  on  which  the 
check  was  drawn. 

In  disapproving  the  custom  among  banks  to  send  checks 
deposited  for  collection  directly  to  the  banks  on  which  they 
are  drawn,  the  court  said :  "It  may  be  admitted  that  a  party 
committing  a  paper  to  a  bank  for  collection  may  be  bound 
by  a  custom  which  is  reasonable  and  sufficiently  general  to 
presume  that  it  is  known.  *  *  *  Undoubtedly  an  agent  who 
undertakes  to  collect  a  claim,  although  by  custom  he  may  be 
allowed  to  employ  sub-agents,  yet  is  certainly  bound  to  select 


182  THE   PRACTICAL  WORK  OF   A   BANK 

his  sub-collecting  agents  with  judgment  and  care,  and  one 
of  the  first  elements  of  care  is  to  select  a  sub-agent  who 
is  not  adversely  interested  in  the  subject  matter.  What 
would  be  the  use  of  a  party  placing  his  claim  in  the  hands  of 
a  bank  for  collection,  if  that  duty  could  be  performed  by 
merely  indorsing  the  paper  by  mail  to  the  party  who  is 
obligated  to  pay  it  and  receive  his  check  on  New  York? 
The  owner  of  the  paper  could  send  it  directly  and  receive 
his  New  York  exchange  in  much  less  time.  A  custom  must 
be  reasonable,  and  the  best  considered  cases  hold,  not  only 
that  the  bank  or  party  who  is  to  pay  the  paper  is  not  the 
proper  party  to  whom  the  paper  should  be  sent  for  collec- 
tion, but  also  that  a  custom  to  that  effect  is  unreasonable 
and  bad." 

Such  a  custom,  however,  has  been  held  valid,  as  applied 
to  a  check  made  payable  to  the  order  of  the  collecting  bank. 
Kershaw  v.  Ladd,  34  Oregon  375.  The  plaintiff  sent  for 
collection  to  the  defendants,  who  were  bankers  at  Portland, 
a  check  drawn  on  a  bank  at  Sheridan,  Oregon,  fifty  miles 
distant  from  Portland.  The  check  was  drawn  by  the  plain- 
tiff and  was  payable  to  the  order  of  the  defendants.  It  was 
received  by  the  defendants  on  the  16th  and  forwarded  di- 
rectly to  the  drawee  bank  on  the  same  day,  by  whom  it  was 
received  the  next  day.  On  the  23d  the  drawee  drew  a  draft 
on  its  correspondent  at  Portland,  which  it  sent  to  the  de- 
fendants on  the  24th,  and  which  was  received  by  the  defend- 
ants on  the  same  day.  On  presentment  payment  was  re- 
fused for  the  reason  that  the  Sheridan  bank  had  closed  its 
doors  on  the  24th.  It  appeared  that  there  was  a  reliable 
express  agency  at  Sheridan  and  that  there  was  also  another 
bank  located  there.  The  bank,  however,  had  been  doing 
business  for  a  short  time  only  and  it  was  not  shown  that  the 
defendants  had  any  knowledge  of  its  existence. 

The  parties  agreed  that  there  was  a  well  established  cus- 
tom among  the  banks  of  Portland  to  the  effect  that,  when  a 
bank  received  for  collection  an  ordinary  check,  drawn  on  a 
bank  in  another  place,  the  collecting  bank  would  forward  the 
check  directly  to  the  drawee  for  collection  and  returns,  pro- 
vided that  the  collecting  bank  had  no  agent  or  correspond- 
ent at  the  place  where  the  drawee  bank  was  located. 

It  was  held  that  this  custom  was  reasonable,  in  so  far,  at 


COLLECTIONS    AND    THE    MESSENGER 


183 


least,  as  it  applied  to  an  unindorsed  check,  payable  to  order 
of  collecting  bank. 

ENDORSEMENTS. 

The  question  of  endorsements  is  one  of  considerable  im- 
portance. Up  to  1898  the  restrictive  form  of  endorsement 
was  used  on  all  items  whether  taken  as  cash  or  for  collection, 
the  form  generally  reading  "Pay  to  the  order  of  receiving 
bank  for  collection,  for  account  of  sending  bank."  The 
matter  of  bank  endorsements  was  revolutionized  by  the  now 


DBAFT    WITH    BELL   OF   TAKING    ATTACHED "ARRIVAL   DRAFT." 


famous  decision  in  National  Park  Bank  v.  Seaboard  Na- 
tional Bank,  114  N.  Y.  28.  In  this  case  a  check  drawn  on 
the  National  Park  Bank  for  $18  was  raised  to  $1,800  and 
sent  to  the  Seaboard  Bank  for  collection  and  credit  and  en- 
dorsed "for  collection  only."  The  check  was  paid  by  the 
Park  Bank  for  $1,800  and  later  it  was  discovered  that  it  was 
raised.  The  Park  Bank  sought  to  hold  the  Seaboard  Bank, 
which  had  turned  over  the  proceeds  to  its  correspondent,  the 
account  having  been  closed.  It  was  held  that  neither  the 
Seaboard  Bank  nor  the  bank  sending  to  the  latter  was  liable 
under  the  restrictive  endorsement. 

The  case  created  considerable  excitement  in  banking 
circles  and  led  to  the  widespread  use  of  unrestricted  endorse- 
ments, making  the  endorsers  liable  as  such  on  all  items.  The 
New  York  Clearing-House  abolished  all  restrictive  endorse- 


184  THE    PRACTICAL  WORK  OF   A   BANK 

ments  on  paper  passing  through  its  channels.  The  rule  has 
been  adopted  throughout  the  country. 

In  handling  collections  banks  should  exercise  due  care  in 
selecting  agents.  The  Supreme  Court  of  the  United  States 
lays  down  the  general  rule  of  law  to  be  that  the  initial  bank 
it  liable  for  such  damage  as  has  been  sustained  by  the  negli- 
gence of  its  sub-agent  or  collecting  bank.  This  rule  is  mod- 
ified in  many  of  the  States  and  is  as  follows:  "The  initial 
bank,  if  it  selects  as  an  agent  one  who  is  competent  and 
worthy  of  trust  and  transmits  the  paper  to  him,  its  duty  is 
done,  and  the  owner  of  the  collection  must  look  to  the  sub- 
agent  for  any  default  of  which  he  is  guilty." 

A  bank,  however,  may  vary  its  contract  by  express  agree- 
ment, and  this  banks  seek  to  do  by  printed  notices  on  their 
deposit  tickets,  or  on  the  inside  cover  of  pass-books,  to  the 
effect  that  the  bank  assumes  no  responsibility  for  the  collec- 
tion of  any  item  beyond  due  care  and  diligence  in  the  selec- 
tion of  collecting  agents,  and  that  items  are  taken  at  the 
risk  of  the  customer  and  that  the  bank  will  not  be  respon- 
sible for  any  loss  through  failure  or  default  of  the  bank's 
agent.  (See  chapter  on  Receiving  Teller.) 

The  above  case  held  that  the  bank  receiving  paper  in- 
dorsed to  it  "for  collection"  was  a  mere  agent  and  not  re- 
sponsible for  genuineness  after  paying  over  the  proceeds 
to  its  principal.  The  rule  adopted  by  the  New  York 
Clearing-House  and  substantially  followed  by  the  other 
clearing-house  associations  throughout  the  country  exclud- 
ing all  restrictively  endorsed  paper  unless  guaranteed,  ap- 
plies only  to  items  collected  through  the  exchanges.  Usually 
these  items  represent  cash,  having  been  received  on  deposit 
and  credit  given  therefor,  or  the  cash  paid  out  at  once,  by 
the  initial  bank;  the  exceptions  being  collection  items  in  the 
form  of  notes  or  acceptances  made  payable  at  a  bank,  or  an 
occasional  check. 

While  the  strict  language  of  the  resolution  adopted  by 
the  New  York  Clearing-House  Association  limits  the  opera- 
tion of  the  rule  to  items  collected  through  the  exchanges,  yet 
in  all  of  the  principal  cities  where  banks  are  located  which 
do  collecting  for  other  banks,  these  collecting  banks  have 
quite  generally  set  their  faces  against  restrictive  endorse- 
ments for  the  reason  that  they  wish  to  be  protected  in  any 
contingency  which  might  arise,  by  the  warranties  that  go 


COLLECTIONS    AND    THE    MESSENGER 


185 


with  a  general  endorsement.  Some  authorities  insist,  how- 
ever, that  a  bank  in  acting  as  the  agent  in  the  collection  of 
items  should  never  assume  the  warranties  of  a  general  en- 
dorser. This  contention  would  more  naturally  appeal  to 
country  bankers,  and  an  argument  in  support  of  the  restric- 
tive form  of  endorsement  is  given  briefly,  as  follows:  It  is 
a  settled  principle  of  law  that  in  the  absence  of  an  indica- 
tion to  the  contrary,  the  form  of  the  endorsement  controls 
the  title  or  ownership  to  negotiable  paper.  The  title  to  or 
ownership  of  an  item  left  with  a  bank  for  collection  remain- 


Report  by  No. 5235 


Union  Bank  &  Trust  Company 

Jackson,  Tenn., 


.191. 


We  encloce  for  collection  and  remittance: 


(M  OOMXD    BY 


DtftuiN*. 


•Co 


Items  $(0.00  and  under  no  protest. 

Protest  items  not  marked  X. 

Deliver  documents  only  on  payment  of  items. 

Teleeraph  non-payment  of  items  over  $50000. 


COLLECTION     LETTER 


ing  in  the  customer  and  the  bank's  relation  being  simply 
that  of  an  agent,  this  form  of  endorsement  gives  to  all  par- 
ties through  whose  hands  it  passes,  notice  of  this  owner- 
ship, and  that  the  collecting  bank  or  its  agents  acquire  no 
title  therein. 

Where  a  collecting  bank  has  notice  that  the  prior  bank 
has  no  interest  in  an  item  transmitted  for  collection  and 
that  it  is  acting  merely  in  the  capacity  of  an  agent,  the  col- 
lecting bank  cannot  under  any  circumstances  retain  the  pro- 
ceeds as  against  the  true  owner.  But  where  the  collecting 
bank  has  no  notice  and  the  prior  bank  is  indebted  to  it  in 


186  THE   PRACTICAL  WORK  OF   A   BANK 


AMOUNT     I  WHERE  PAYABLE  I      PUE  ENDORSER 


Oriel nal,   foea  with  the   Item. 

PROTEST  tf  no.  paid. 


THE  FAVOR  OF  PROMPT  RETURNS  IS  REQUESTED  UPON  THE  ITEM  HEREWITH  ENOjOSED  FOR  COLLECTION. 

RESPECTFULLY,  IRVING    NATIONAL   BANK 
NEW  YORK. 


AMOUNT     I  WHERE  PAYABLE  DUE 


Acknowledgement,    returned   to  banld 


Above  itfrA   received  and  entered  for  collection,  •• 


PLEASE  SIGN  AND  RETURN  BY  FIRST  MAIL  To  Irving  National  Bank 

New   York. 


AMOUNT  WHERE  PAYABLE  DUE 


Held  In  bank  until  item  is  paid.   gent  to  customer. 

Date    Advised    Paid 
CREDIT   BILLS  DISCOUNTED. 


DEBIT 


AMOUNT  WHERE  PAYABLE  DUE 


This  copy  forms  the    charge  ticket  to  the  collecting  tank. 


COLLECTION    LETTER   FOR   BANK'S   OWN    PAPER THREE    CARBONS   AND    ONE    ORIGINAL 

general  balance,  in  the  event  of  the  failure  of  the  prior  bank, 
it  is  generally  held  that  the  collecting  bank  can  hold  the  pro- 
ceeds of  a  collection  against  the  true  owner.  The  right  of 
lien  rests  upon  the  further  consideration,  viz.,  that  in 
the  case  of  negotiable  paper  one  who  successfully  enforces 
a  lien  must  be  a  holder  for  value  and  without  notice.  In 


COLLECTIONS    AND    THE    MESSENGER  187 

most  of  the  States,  in  fact,  in  all  of  the  States  which  have 
adopted  the  Negotiable  Instruments  Law  (Wisconsin  ex- 
cepted),  an  antecedent  or  preexisting  debt  constitutes  value. 
The  qualification  without  notice  expressed  in  full  is  "with- 
out notice  of  equities  existing  between  prior  parties." 

It  may  be  contended  that  these  considerations  are  of  in- 
terest to  the  customer  of  a  bank  rather  than  to  a  bank,  and 
that  the  customer  should  safeguard  his  own  interests  by 
using  the  appropriate  form  of  endorsements  on  his  collec- 
tion items,  rather  than  expecting  the  bank  to  protect 
these  interests  for  him.  It  may  also  be  claimed  that  where 
the  customer  leaves  an  item  for  collection  endorsed  in  blank, 
or  to  order,  and  the  item  is  sent  direct  to  the  collecting  bank, 
that  in  the  event  of  default  by  either  bank,  the  position  of 
the  customer  will  not  be  improved  by  the  mere  fact  that  the 
sending  bank  had  endorsed  the  item  restrictively.  As  to  the 
latter  contention,  we  answer  that  neither  is  the  position  of 
the  bank  or  its  customer  made  worse  by  the  use  of  the 
restrictive  form  of  endorsement,  and  that  where  one  or  more 
banks  intervene  between  the  initial  and  the  collecting  banks 
in  the  chain  of  transmission,  the  rights  of  the  bank  and  of 
its  customer  are  preserved  by  the  use  of  such  endorsement 
in  any  contingency  which  may  arise. 

As  to  the  first  contention,  a  bank  has  items  to  be  col- 
lected which  belong  to  it,  viz.:  discounted  bills  or  notes. 
It  will  surely  not  be  denied  that  its  duty  to  its  stockholders 
makes  it  incumbent  on  a  bank  to  take  every  precaution  in 
the  collection  of  this  paper,  so  as  to  protect  the  bank  against 
possible  loss.  As  this  is  the  course  which  prudence  dictates 
in  such  a  case,  and  as  it  is  the  duty  of  the  bank  as  agent  to 
act  as  a  prudent  man  would  in  his  own  affairs,  it  becomes 
its  duty  in  the  forwarding  of  items  left  for  collection  to  use 
that  form  of  endorsement  which  will  best  preserve  the  rights 
of  a  customer  in  possible  contingencies  which  might  arise. 
There  is  perhaps  no  better  general  rule  of  business  policy 
for  a  bank  to  adopt  in  the  management  of  its  collection  de- 
partment than  that  quoted  as  the  measure  of  its  legal  duty, 
and  if  a  bank  uses  "ordinary  care  and  diligence,"  always 
"keeping  in  mind  the  best  interests  of  its  principal,"  its  suc- 
ress  in  holding  old  and  in  securing  new  business  should  be 


188  THE   PRACTICAL  WORK  OF   A   BANK 

assured ;  provided,  of  course,  that  it  is  in  a  position  to  collect 
as  cheaply  as  will  its  competitors.2 

THE  MACHINERY  OF  COLLECTIONS 

Collections  consist  of  all  forms  of  commercial  paper  and 
include  many  items  which  are  not  commercial  paper,  strictly 
speaking.  A  bank  may  handle  under  this  classification  in 
the  course  of  a  year's  business,  bonds,  coupons,  notes,  mort- 
gages ;  sight,  demand,  time,  domestic  and  foreign  drafts ;  bill 
of  lading  drafts,  every  known  form  of  insurance  claim  and 
voucher;  certificates  of  deposit,  checks  and  bank  drafts, 
checks  on  savings  accounts  with  pass-books  attached;  muti- 
lated coin  and  currency,  foreign  money,  even  pawn  tickets 
and  tickets  for  winnings  on  races  and  prize  fights. 

Checks  are  payable  on  demand ;  time  items  when  due,  as 
indicated  on  the  face.  If  they  are  sent  for  acceptance  before 
due,  the  drawee  writes  the  word  "accepted"  and  his  name, 
when  the  item  is  held  until  due  and  presented  for 
payment.  Sight  drafts  are  payable  on  presentation.  They 
may  be  paid  by  accepting,  payable  at  the  bank,  and  this  is 
authority  for  the  bank  to  charge  the  customer's  account  and 
remit. 

A  "city  collection"  is  one  which  is  to  be  presented  by  the 
messenger.  A  foreign  collection  is  one  to  go  through  the 
mails,  the  holding  bank  being  simply  a  link  in  the  chain  of 
collection.  If  an  item  subject  to  protest  is  lost  it  may  be 
protested  by  a  description,  so  it  becomes  needful  that  the 
record  be  complete  as  to  details.  Banks  should  follow  the 
advice  of  their  correspondents  in  the  matter  of  protest,  and 
banks  should  indicate  their  wishes  in  the  letter  accompany- 
ing the  item.  Protest  where  protest  is  instructed;  and  if 
there  is  an  indorser  who  would  be  released  if  protest  were 
not  made,  the  item  should  be  protested.  Unpaid  items 
should  be  returned  promptly;  advice  given  of  paid  items, 
or  remittance  for  the  same  the  day  received,  and  indirect 
routing  avoided  in  collection  items.  If  items  are  returned, 
always  give  the  reason.  Time  drafts  should  be  presented 
promptly  for  acceptance. 

The  items  which  a  bank  handles  may  be  divided  into  two 

2  Pamphlet  on  Clearing-House,  etc.,  issued  by  American  Institute  of  Banking. 


COLLECTIONS    AND    THE    MESSENGER 


189 


IRVING  NATIONAL  BANK 

NEW  YORK. 


D.T.   .,C«n,.D 

NUM.C. 

»     A    Y    I     • 

AMOUNT 

DUtf 

D,.PO.,T,0. 

This  copy  goes   to  the  cui 

tODMSn. 

IRVING  NATIONAL  BANK 

NEW  YORK. 


CATC   RECEIVED 

NUM... 

,.,..- 

.MOUNT 

DU. 

•  ••roi.Tio. 

an 

This  copy  goes  to  the  bo 

>kkeeper. 

IRVING  NATIONAL  BANK 

NEW  YORK. 

^^^^ 

DAT.  ..CC.V.O 

NUM.» 

uowrr 

DUE 

O...O..T.ON 

MATUR1 

TY   S 

LIP 

IRVING  NATIONAL  BANK 

NEW  YORK. 

•o- 

OAT.  .(C.IV.O 

AMOUNT 

DU. 

D..*O..T,ON 

This  copy   forms   the  per 

manent  re 

:ord. 

CITY   COLLECTION    FORM ONE    ORIGINAL,    THREE    CARBONS — SEE    EXPLANATION    ON    FORM 

main  groups:  The  cash  items  and  the  collection  items.  The 
latter  may  be  still  further  classified  into  items  immediately 
payable  and  essentially  cash  items,  and  the  time  items.  The 
former  class  includes  all  drafts  and  notes  which  are  payable 
at  sight;  while  the  latter  includes  those  payable  at  a  fixed 
time,  and  are  usually  received  or  sent  in  advance  of  the  time 


190 


THE    PRACTICAL  WORK  OF   A   BANK 


of  payment  so  that  they  will  be  ready  for  presentation  at 
the  date  due.  Cash  items  are  immediately  convertible  into 
money,  and  time  items  are  to  be  turned  into  money. 

To  facilitate  the  handling  of  these  items,  it  has  been 
found  best  to  divert  them  into  two  channels,  and  this  is 
done  in  cooperation  with  the  depositor,  who  is  advised  to  list 
all  checks  separately  and  all  collection  items,  including 
drafts,  coupons,  etc.,  likewise.  A  "collection"  is,  therefore, 


RECALL    NOTICE 

Irving:    National     Bank 


191 


Please  Return  Without  Protest 


Youn  rapectfully. 


Collision  Clak 


RECALL   NOTICE    FOR    COLLECTION    ITEM 


an  item  to  be  collected.  And  in  order  to  have  a  clear  under- 
standing of  just  what  happens  in  this  connection,  it  may  be 
well  to  anticipate  the  chapter  on  the  "Mail,"  and  follow  a 
sack  of  mail  as  it  comes  from  the  post  office.  As  the  letters 
are  opened  their  contents  are  sorted,  the  cash  items,  checks, 
etc.,  being  placed  by  themselves  and  collections  by  them- 
selves. 

We  are  concerned  now  with  a  collection  only.  There 
must  first  be  a  complete  record  of  the  paper,  and  the  item 
must  have  care  while  in  custody  of  the  bank  until  it  is  final- 
ly disposed  of  by  payment  or  returned  to  the  source  from 
whence  it  came.  Its  due  date  is  the  most  important  part. 

The  clerk  compares  the  item  with  the  letter  which  ac- 
companies it,  noting  instructions  as  to  whether  to  protest 


COLLECTIONS    AND    THE    MESSENGER  191 

or  not.  The  instructions  on  collection  letters  differ,  some 
banks  directing  that  all  items  riot  marked  "no  protest" 
should  be  protested;  others  that  only  items  over  a  certain 
amount  must  be  protested,  and  others  mark  all  items  to  be 
protested;  but  whatever  the  rule  the  notice  should  be  heeded 
and  passed  on  to  the  next  in  line  unless  the  instructions 
are  to  be  changed. 

The  drafts  which  the  collection  clerk  will  receive  for  col- 
lection are  sight  drafts  payable  on  presentation;  time  drafts 
payable  a  certain  time  after  date  or  at  a  designated  date; 
drafts  with  bills  of  lading,  the  latter  to  be  surrendered  upon 
paying  the  draft  or  accepting  it,  and  drafts  drawn  "on  ar- 
rival" of  the  goods.  When  the  latter  are  received  they  are 
listed  in  the  "arrival  book"  and  the  drawee  notified.  They 
are  held  until  called  for  and  payment  made  and  often 
accompany  large  shipments  moving  by  slow  freight.  Sight 
drafts  are  presented  as  soon  as  received ;  time  drafts  are  held 
until  their  due  date,  but  are  generally  presented  for  ac- 
ceptance as  soon  as  they  are  received.  By  accept- 
ing the  time  draft,  the  acceptor  engages  that  he  will 
pay  when  due.  It  makes  it  a  promissory  note.  If  the  no- 
tice is  sent  by  mail,  note  is  made  of  the  fact  in  the  record, 
and  if  the  drawee  does  not  respond  (he  has  twenty-four 
hours  in  which  to  accept),  it  is  returned.  If  a  bill  of  lading 
or  other  papers  are  attached,  the  instructions  as  to  dis- 
position are  noted  and  followed. 

Let  us  take  a  note  of  John  Smith  for  $500,  payable 
June  1st,  1915,  at  the  First  National  Bank,  New  York, 
received  from  the  First  National  Bank  of  Philadelphia. 
The  number  on  the  note  is  15,534.  It  is  first  verified  as  to 
maturity,  and  the  maturity  usually  indicated  in  colored 
pencil.  Being  a  home  note,  it  is  recorded  in  the  home  tick- 
ler, or  city  collection  register,  under  June  1.  The  data  re- 
corded is:  Date,  time  to  run;  name  of  maker;  where  pay- 
able; when  received;  from  whom  received;  the  number, 
amount,  protest  or  not;  our  number  (indicated  by  number 
corresponding  to  line  on  which  it  is  entered),  fate  and  re- 
marks. The  data  may  be  considerably  abbreviated  by  us- 
ing such  abbreviation  marks  as  1/14,  1st.  Phil.,  etc.  The 
column  of  "fate"  is  left  open,  of  course,  until  the  item  is 
paid,  returned  unpaid,  protested  or  recalled.  If  protested 

13 


Original  ,  co«e  with  item  for  collection. 


NO   PROTEST 

Th«  favor  of  PROMPT  RETURN3  !•  r«qu«*t*d  upon  th»  Item  h«r»wUll  «»olo««<l  lor'ooU»otlor>. 


IK   UNPAID  F-LBA3B   OIVK    FULL  REASON 


Irving  National  Bank 

New    York. 


This  copy  held   In  bank  for  traclne  purposes. 


Tracing  Slip 


Irving  National  Bank 

New    York. 


IXA.XCC   BKttT 

0    R    A    W    K    K 

±  AMOUNT     |          DUE         |  mUtt 

MPMHIS 

BNOOn.IH 

This  copy  the  t>t 

s  permanent  reclord  o 

r  the 

Iteo. 

Irving  National  Bank 

X«w    Yorlt. 


this  copy  eoes  to   customer  as   advice,  of  payme 


IRVINO    NATIONAL   BANK 
New    Yorlc. 


Ad-vioe   for 


This  copy     formsthe   credit   ticket  to  customer 


licuiw  .Mccnns 
to  customer 


1   .  X  J  ..    i  :».- 

_Net   Crwdli 


Irving  National  Bank 

New    Yorlc. 


DEBIT 


copy  constitutes  the  charge   ticket   tc   the  coll^c'-.ing  VanV. 


Irving  National  Bank 

New    Yorlt. 
COLLECTION    LETTER SIX   CAUON8,  ONE   OBIOINAL SEE   EXPLANATION"   OTX    FORM 

192 


COLLECTIONS    AND    THE    MESSENGER  19S 

the  word  "Notary"  is  entered  opposite  with  the  date  indi- 
cating that  it  went  to  the  bank's  notary  for  protest  on  that 
date. 

NOTIFICATION 

It  is  customary  for  banks  holding  items  for  collection 
to  mail  notice  to  the  maker  or  drawee  a  week  or  so  before 
the  item  is  due.  The  next  step  is  to  make  out  a  credit  and 
advice  slip,  which  are  to  be  used  if  the  note  is  paid.  Carbon 
is  used  and  two  copies  made.  In  one  large  city  bank  all 
city  items  requiring  presentation  or  payable  through  the 
clearing-house  are  written  up  on  carbon  books,  whereby 
credit  ticket  advice  of  credit  and  file  record  are  made  in  one 
operation,  then  they  are  sent  out  by  messengers  for  presen- 
tation to  the  parties  on  whom  they  are  drawn.  The  messen- 
gers make  their  returns  to  the  note  teller,  who  puts  through 
the  credits  for  them.  Time  items  presented  for  acceptance 
are  returned  to  the  collection  department,  after  acceptance, 
when  they  are  treated  as  notes. 

The  city  and  country  notes  are  separated,  the  maturity 
dates  and  interest  are  figured  on  the  city  items  and  they  are 
entered  on  a  collection  tickler  under  maturity  dates,  also  in 
an  index  book  under  the  name  of  the  correspondent  from 
whom  received,  so  that  they  can  be  located  in  case  the  owner 
should  enquire  about  or  recall  them.  Then  a  credit  ticket 
and  advice  (original  and  duplicate)  are  made  and  attached  to 
each  item  and  they  are  delivered  to  the  note  teller,  for  col- 
lection at  maturity.  The  collection  tickler  is  a  loose  leaf 
book,  and  each  day  the  leaf  for  that  day  is  turned  over  to 
the  note  teller,  who  must  account  at  the  close  of  the  day's 
business  for  each  item  listed  on  it. 

When  paid  the  credit  ticket  is  sent  to  the  bookkeeper 
and  the  duplicate  to  the  owner.  The  ticket  contains  the 
number,  name  of  maker,  amount,  when  due,  and  where  pay- 
able. Open-faced  "window"  envelopes  are  used  to  avoid  ad- 
dressing envelopes. 

After  recording  the  items  thej^  are  held  until  maturity, 
and  if  a  note-teller's  department  is  operated,  they  are 
turned  over  to  him  for  collection  on  the  due  date.  The  work 
of  this  department,  therefore,  follows. 


194 


THE    PRACTICAL  WORK  OF   A   BANK 


COLLECTION  DEPARTMENT  TRACER 


Guaranty  Trust  Company  of  New  York 


New  York, 


Dear  Sir 


Please  report  on  the  following  collections: 


Guaranty  Trust  Company  of  New  York 

COLLECTION    DEPARTMENT   TRACER 


THE  NOTE  TELLER 
/ 

The  items  that  come  to  the  note  teller  may  be  from  the 
bank's  correspondents,  or  the  bank's  own  paper  that  must 
be  collected,  and  items  received  from  the  tellers  for  like 
purpose.  Inasmuch  as  the  note  teller  handles  the  same  class 
of  items  as  the  collection  clerk  he  makes  the  same  records, 
but  his  work  involves  considerable  cash,  since  the  items  will 
be  paid  for  in  cash,  checks,  etc.  The  note  teller,  therefore, 
carries  a  cash  balance  since  he  is  receiving  pay  for  maturing 
notes  and  drafts  constantly.  In  some  banks  he  is  also 
charged  with  the  collection  of  interest  on  loans,  the  list  of 


for.  W-WnSMai'-  

Qty*  ilarkrt  anil  Julian  &atun 

New  York,_ 
Please  report  BY  RETURN  MAIL  on  the  following  items: 

tal  lank. 

191 

NAME 

PLACE 

SENT 

DUE    |    AMOUNT 

ANSWER   HERE 

Mr  IF  NOT  PAID.  RETURN  AT  ONCE  -w 

Yours  respectfully, 
JOHN  H.  CARR,  Cashier. 

TRACER   FOR   COLLECTION   ITEBIS 


COLLECTIONS    AND    THE    MESSENGER  195 

amounts  due  being  furnished  him,  notices  being  sent  out, 
and  as  payments  are  made  they  are  taken  off  the  list,  the 
amount  unpaid  being  known  from  this  list.  Exchange 
charges  are  also  listed  and  collected  by  him,  some  customers 
preferring  to  pay  these  charges  in  cash  rather  than  to  have 
them  deducted  from  the  deposits.  As  the  note  teller's  cash  be- 
comes more  than  he  needs,  he  will  turn  it  over  to  the  pay- 
ing teller.  He  receives  from  the  discount  clerk  the  day's 
maturities,  and  is  accountable  for  all  that  he  receives,  and 
must  return  the  items  or  the  cash  at  the  end  of  the  day. 
Notes  that  are  to  be  paid  through  the  exchanges  are,  of 
course,  put  in  with  the  exchanges  of  the  day,  and  those  to 
be  presented  by  messenger  sent  out  on  the  route. 

If  a  note  is  to  be  paid  the  note  teller  will  have  instruc- 
tions to  honor  it  through  the  exchanges,  and  these  items  are 
sent  to  him,  and  if  not  instructed  otherwise,  they  are  paid 
by  him  and  charged  to  the  customer's  account.  The  making 
of  a  note  payable  at  a  bank  where  the  maker  carries  his  ac- 
count is  equivalent  to  an  order  on  the  bank  to  pay  the  same, 
and  unless  instructed  otherwise  the  bank  will  do  so. 

Notes  are  often  presented  over  the  counter,  and  the  bank 
will  accept  the  note,  payable  through  the  clearing-house,  and 
so  stamp  it,  and  it  becomes  a  cash  item  for  the  next  day's 
clearings.  All  notes  coming  through  the  clearing-house  for 
which  no  provision  has  been  made  as  to  payment  are  sent 
back  to  the  bank  from  which  they  came  before  the  expira- 
tion of  the  time  limit. 

Notes  that  at  the  end  of  the  day  have  not  been  paid  are 
protested,  by  handing  to  the  bank's  notary,  who  makes  out 
formal  notice  of  protest  and  mails  copies  of  the  same  to  the 
indorsers.  After  the  notary  has  made  legal  presentment 
and  protest,  the  item  is  returned  from  whence  it  came,  and 
the  fees  charged  to  the  indorser.  If  it  is  the  bank's  own 
paper,  it  is  held  for  adjustment  among  the  past  due  items. 

The  teller  proves  by  taking  the  cash  balance  at  the  be- 
ginning of  the  day,  and  adding  what  he  received  and  credit- 
ing himself  with  payments  made,  the  balance  being  the 
amount  called  for  in  his  cash.  After  the  day's  work  is  ove* 
except  balancing,  the  teller  will  have  on  hand,  cash,  coin, 
checks  on  local  banks,  and  it  may  be  a  few  on  out-of-town 
banks.  These  are  charged  to  the  different  departments,  and 
surplus  money  turned  over  to  the  paying  teller.  All  cash 


NEW   YORK. 

CAPITAL  $4.000.000 
SURPLUS  S3.000.000 

New  York, 


N?      2286 


We  enclose  the  following  items  for  Collection  and   Remittance. 

Your*  truly. 

Telegraph  Non-Payment  of  items  ex-  MARRY  r    WARD 

ceeding  $500.00.     Items  under  $25.00 
and  those  marked  X  NO  PROTEST  Cashier. 


PLEASE  SIGN  AND  RETURN  IMMEDIATELY 

IRVING  NATIONAL  BANK 
NEW  YORK. 

The    within    described    Cash    Letter     ]^O  2286 

has  been  received  with  enclosures  as  stated. 
Yours  truly, 


NAME    OF    BANK 

Remarks  : 


IRVING  NATIONAL  BANK 

NEW  YORK. 


Our  Cash  Letter     ]^9 

Acknowledgement  Received- 
Traced 


CASH   TRANSIT    LETTER LOWE*    PAST    IS    CARBOIT    COPY    KEPT    FOR    TRACING COLLECTION 

1»6  AKD    TKAVUT    LETTERS    ABE    CHECKED    IV  THIS    BANK    BT    XUMBEU 


COLLECTIONS    AND    THE    MESSENGER  197 

might  be  so  turned  in,  the  note  teller  making  no  payments 
in  cash,  his  cash  being  incoming  only.  If  he  should  be 
charged  with  honoring  notes  payable  at  his  bank,  payment 
would  be  by  cashier's  checks,  clearing-house  due  bill,  or  an 
acceptance  payable  through  the  clearing-house  the  next  day. 

OUT-OF-TOWN  COLLECTIONS 

The  term  "transit  item"  is  properly  applied  to  those 
items  received  in  the  regular  course  of  business  which  are 
immediately  credited  and  which  are  treated  as  cash.  These 
are  largely,  if  not  quite  altogether,  checks;  while  collections 
are  made  up  principally  of  notes,  drafts,  bills  of  exchange 
and  other  items  left  for  collection  by  customers,  credit  to  be 
given  only  when,  as  and  if  collected. 

These  items  do  not  appear  on  the  statement  of  condition, 
and  are  not  assets  of  the  bank,  nor  does  any  liability  accrue 
until  collection  is  made,  except  it  be  for  the  use  of  care. 

The  collection  department  is  closely  associated  with  the 
receiving  teller's  department,  since  it  is  charged  with  the  col- 
lection of  all  items  received  by  him  that  do  not  (a)  go  direct 
to  the  bookkeepers;  (b)  items  that  do  not  go  through  the 
clearing-house,  and  (c)  transit  items,  which  are  to  go  out  as 
cash.  The  transit  and  collection  departments  may  be  one, 
or  two,  as  the  needs  of  the  bank  require;  or  this  work  may, 
as  frequently  obtains,  be  part  of  the  bookkeeping  system 
and  be  done  in  connection  with  the  duties  of  other  men;  but 
whatever  the  machinery  of  the  bank,  the  purpose  is  to  ob- 
tain payment  for  such  items  as  are  not  to  be  regarded  as 
cash  by  the  receiving  teller,  and  to  turn  into  cash  the  items, 
such  as  coupons,  etc.,  cashed  by  the  paying  teller  or  received 
from  correspondents. 

The  out-of-town  collections  will  consist  of  all  instru- 
ments that  are  not  regarded  as  cash,  or  which  require  more 
care  and  attention  than  a  cash  item  is  given,  as,  for  instance, 
a  block  of  bonds  for  registry,  or  a  deed  to  be  delivered  upon 
receipt  of  the  money,  etc.  Of  late  years  it  has  been  the  cus- 
tom among  merchants  to  draw  on  their  debtors  if  the  bill  is 
not  paid  according  to  pre-arranged  terms,  and  these  drafts 
are  sent  out  by  large  firms  by  the  hundreds.  They  must  be 
presented  for  payment,  and  this  is  part  of  the  work  of  the 
collection  department  and  the  messenger. 


198 


THE    PRACTICAL  WORK  OF   A   BANK 


A  great  many  of  these  collection  items  are  frequently 
no  more  or  less  than  "duns,"  and  many  are  returned  with 
the  notation  "will  send  check."  Some  merchants  expect 
that  their  firms  will  draw  on  them  and  make  it  a  policy  to 
honor  such  drafts,  as  a  simple  and  easy  way  of  making  pay- 
ment, leaving  it  to  the  firm  to  use  its  judgment  as  to  when 
to  draw.  Some  banks  refuse  to  handle  such  items  unless  a 
modest  fee  accompanies,  arid  in  this  they  are  fully  justified, 
for  the  process  consumes  time,  expense  and  labor  and  is 


N?  18892 

Maturity        April   lr 
Endorser Sep.  W.  Evans 


Amount,  $. 
1915  Interest,  $_ 
Total,  $. 


8QQ.  QQ 


Maker . 


Mr.  E.    J.   Balloy, 


City 


THIS   SLIP   ATTACHED   TO    NOTE    UNTIL   DISPOSED   OF   BY   RENEWAL  OR  PAYMENT 


largely  a  courtesy,  the  profit  being  inconsiderable.  Drafts 
accompanying  shipments  of  merchandise  are  also  collected 
in  this  way. 

The  maturity  dates  of  country  notes  are  figured  and 
noted  on  each  and  they  are  listed  in  a  register  and  numbered 
to  correspond  with  the  numbers  on  the  register.  Then  they  are 
endorsed  to  the  bank's  various  correspondents  in  the  towns 
where  the  items  are  payable,  and  a  letter  written  to  accom- 
pany each  item.  The  letters  are  written  on  a  form,  using 
a  carbon  sheet,  which  makes  a  copy  of  the  letter  on  a  card, 
and  the  name  of  the  owner  of  the  item  is  written  or  stamped 
at  the  top  of  the  card.  These  cards  are  then  filed  according 


COLLECTIONS    AND    THE    MESSENGER  199 

to  maturity  dates,  and  the  cards  under  each  date  arranged 
alphabetically  according  to  the  place  where  payable. 

This  system  will  be  found  very  convenient  for  handling 
country  collections.  The  register  refers  to  the  card  by  means 
of  maturity  date  and  town  where  payable  and  the  card  to 
the  register  by  means  of  the  number,  so  that  it  is  always 
possible  to  locate  an  item  from  the  owner's  tracer,  and  one 
can  always  tell  at  a  glance  what  items  are  due  or  past  due. 
Correspondents,  when  writing  or  telegraphing  about  an 
item,  or  when  remitting  for  paid  collections,  often  neglect  to 
give  proper  description  of  the  items.  It  is  very  desirable, 
therefore,  to  be  able  to  locate  such  items  quickly  on  your 
records.  This  card  record  makes  it  possible  to  locate  items 
readily  even  though  imperfectly  described.  After  the  items 
are  paid,  or  otherwise  disposed  of,  the  cards  are  filed  in  an- 
other file  under  the  name  of  the  owner  of  the  note. 

Credit  tickets  for  these  items  and  all  other  out-of-town 
items  are  made  when  payment  is  received,  on  a  duplicate 
form,  using  a  carbon  sheet ;  the  carbon  copy  being  the  advice 
of  credit  and  the  original  the  credit  ticket ;  the  original  going 
to  the  bookkeeper  and  the  duplicate  to  the  customer. 

Let  us  suppose  that  June  2nd  arrives  and  in  the  morn- 
ing mail  there  is  advice  to  the  effect  that  No.  15,534  sent  to 
the  First  National  Bank  of  New  York  has  been  paid. 
Turning  to  the  cabinet  the  clerk  finds  the  duplicates  of 
the  slips  that  have  gone  to  the  First  National  Bank  of  New 
York  and  takes  out  the  three  connected  with  this  item. 
He  compares  the  number  and  amount  with  the  advice  re- 
ceived. He  marks  the  item  paid  in  the  tickler,  sends  one 
slip  to  the  bookkeeper  for  credit  to  the  depositor  from 
whom  received,  one  to  the  bookkeeper  to  charge  against  the 
bank  crediting  the  item,  and  one  is  kept  for  record. 

Where  the  bank  has  no  regular  correspondent  in  the 
place,  it  will  send  to  the  nearest  town  where  it  has  connec- 
tions, and  thus  from  bank  to  bank  the  item  will  go  until  it 
reaches  the  place  of  payment.  Frequently  the  bank,  in  order 
to  save  time,  will  despatch  the  item  in  a  more  direct  route, 
to  some  bank  in  the  place  where  the  instrument  is  payable, 
preferably  some  other  bank  than  the  one  drawn  on,  and  by 
using  the  bank  directories  such  a  proper  collecting  agency 
will  be  selected. 


To 


OTTI  INT 

;..Um! 

>  *  »  t  • 

MIIHIIT 

Endorser 

Orl  final. 

Thle  copy  e°es  with  the  Item. 


PROTEST  unlew  otherwise  inrtructecl 


The  favor  of  PROMPT  RETURNS  u  requeued  upon  the  item  herewith  enclosed  for  collection. 

IRVING  NATIONAL  BANK 

NEW  YORK. 


To 


j _       M    i. 

h«   item,   tube   slgnedjar.d   retw 


Endorser 


This  copy  goes  with  th«   Item,   td  be  signed,  ar.d  returned 


IRVING  NATIONAL  BANK 

NEW  YORK. 


To 


.««.. 

•oc4Mmrr« 

M 

Endorser 

This  copy  is  held     In  the  Ijank  fcr  tracing.  Piled  under 
dates. 


Maturity  Slip 


IRVING  "NATIONAL  BANK 

NEW  YORK. 


i    Thia  Is  "th»  tank's  pemknent  record.     Piled  under  customer 


Customer 


To  be  filed  under  Customer 


IRVING  NATIONAL  BANK 

NEW  YORK. 


Advice  For 


This  copy  goes   to  ..the  customer  when   the   itei   is  paid. 
Expense 


IRVING  NATIONAL  BANK 

NEW  YORK. 


t._..__       I      .«_.«._.     1 
— j   — r 
eeper  ae  a  credit)  tc 


Disposition 


Debit 


IRVING  NATIONAL  BANK 

NEW  YORK. 


Endorser 


^E»*> 

This  dopy  oecomes   the  chire*  ticket  to  the  bank  coljectln 
the  item. 


IRVING  NATIONAL  BANK 

NEW  YORK. 


FORM    USED    IN    COLLECTION    DEPARTMENT,    IRVING    NATIONAL    BANK,    NEW    YORK.       SKK 
EXPLANATION    IN    THE    FORM.      SIX    CARBONS    AND    ONE    ORIGINAL 

200 


COLLECTIONS    AND    THE    MESSENGER  201 

Some  banks  have  running  accounts  in  all  principal  cities, 
settled  periodically  or  daily.  Thus,  if  a  bank  in  New  York 
has  an  item  to  collect  in  Cleveland,  Ohio,  it  will  send  the 
item  to  its  Cleveland  correspondent  for  that  purpose.  The 
Cleveland  bank  will  present  the  instrument  through  its  mes- 
senger and  either  return  the  item  unpaid  or  credit  the 
amount  to  the  New  York  bank  and  so  advise  it.  If  it  has 
no  account,  it  will  remit  by  a  draft  less  its  charges  for  the 
service. 

SUNDRY  ITEMS 

There  is  a  class  of  items  that  pass  through  the  bank  as 
cash  and  go  to  banks  where  no  regular  correspondent  exists. 
To  open  account  for  each  bank  so  used  would  be  needless 
and  consume  time  and  space.  Therefore,  an  account  is  kept 
with  "sundry  banks"  in  the  general  ledger,  to  which  is 
charged  items  that  are  sent  to  other  than  regular  corre- 
spondents, and  returns  credited,  the  balance  representing 
the  amount  so  outstanding. 

COUPONS 

A  coupon  has  been  defined  as  a  "little  promise  to  pay" 
as  distinguished  from  the  parent  bond,  which  is  the  "big 
promise  to  pay."  Coupons  are  payable  to  bearer  and  usually 
regarded  as  good  as  money,  are  finely  engraved,  difficult  at 
times  to  read,  small,  and  generally  difficult  to  handle.  They 
are  usually  payable  at  the  fiscal  agency  of  the  issuing  com- 
pany, which  is  not  always  named  in  the  coupon,  and  this 
information  has  to  be  obtained  from  other  sources. 

Banks  usually  require  interest  coupons  to  be  inserted  in 
envelopes  containing  on  the  outside  the  name  of  the  deposi- 
tor, name  of  issuing  company,  when  due,  where  payable, 
number  of  coupons  and  the  amount.  If  they  are  due  they 
are  generally  treated  as  cash.  If  not,  they  are  held  for  col- 
lection. They  come  through  the  various  departments  of  the 
bank,  receiving  teller,  mail,  express,  or  from  the  special  safe- 
keeping department  of  the  bank,  or  are  cut  from  bonds  held 
as  investment  or  collateral.  If  they  are  for  collection  they 
are  sent  through  the  collection  department;  if  as  cash  they 
may  go  through  the  transit  department,  and  are  sent  by 


•202  THE    PRACTICAL   WORK   OF   A   BANK 

SLXIF. 


PHILADELPHIA,  PA. 
COUPON  SLIP 


registered  mail,  insured,  to  the  place  of  payment.  If  pay- 
able in  the  same  place,  they  are,  of  course,  presented  by  mes- 
senger and  payment  in  satisfactory  form  returned.  Being 
in  the  nature  of  cash  they  are  handled  with  special  care  and 
receipted  for  as  they  pass  from  hand  to  hand. 

Under  the  Income  Tax  Law,  it  is  required  that  coupons 
be  accompanied  by  proper  certificate  of  ownership  and  state- 
ment as  to  whether  or  not  exemption  is  claimed.  Banks  there- 
fore carry  in  stock  a  supply  of  the  various  blanks  for  this 
purpose  and  receive  for  collection  coupons  only  when  accom- 
panied by  certificate  properly  signed.  They  do  not,  however, 
vouch  for  the  statements  made  by  the  owner  of  the  bonds,  nor 
pass  upon  any  point  in  connection  with  the  tax.  It  is  their 
function  only  to  see  that  the  certificate  accompanies  and  is 
properly  filled  out. 

SAVINGS  BANK  BOOKS 

Savings  bank  accounts  are  frequently  collected  through 
other  banks,  and  where  the  account  is  not  closed  out,  require 
the  return  of  the  book.  The  book  frequently  goes  astray 
unless  special  note  is  attached  indicating  what  disposition  is 
to  be  made  of  it  when  the  collection  is  made.  In  sending 
such  collections  through  a  chain  of  banks,  the  book  usually 
returns  through  the  same  channel  through  which  it  came, 
and  it  is  very  apt  to  find  a  lodging  place  somewhere  en  route 
and  become  lost  or  mislaid  in  the  files  of  some  collecting 
bank,  there  to  remain  until  hunted  down — a  process  which 
is  annoying  and  should  be  unnecessary.  How  much  better 
it  would  be  for  the  bank  receiving  the  item  in  the  first  place, 


COLLECTIONS    AND    THE    MESSENGER  203 

NATIONAL  BANK  OF  SGHWENKSYILLE. 

SCHWENKSV1LLE,  PA. 


Coupons  of. 


-e** 


DO  NOT  ENCLOSE 
COUPONS  OF  DIFFER- 
ENT COMPANIES  IN 
SAME  ENVELOPE. 


'. 190  ±J-      Payable  at..., 

•*'IF  COUPONS  ARE  NOT  PAID.   RETURN   IN  THIS   ENVELOPE  WITH   REASON. 


Mat-urn  tririii  tun. 

COUPON    ENVELOPE 


to  attach  a  slip  to  the  book,  directing  that  the  book  be  re- 
turned to  the  owner  direct  from  the  paying  bank.  But 
banks  are  so  in  the  habit  of  returning  items  through  the 
same  channel  as  received,  and  the  average  teller  being  all 
too  glad  to  get  the  transaction  closed  with  as  little  delay  as 
possible,  does  the  simplest  and  easiest  thing  —  pays  the  item, 
if  regular,  and  hands  the  book  back  to  the  presenting  bank, 
which  in  remitting  should  not  only  send  its  draft,  but  the 
book  also.  A  little  thought  in  the  first  instance  will  save 
a  lot  of  trouble  in  the  future.  Lost  savings  bank  books  are 
not  easy  to  replace,  some  banks  requiring  bond  of  indemnity, 
advertising,  etc. 


z 

I 

• 

t 

LAST  ENDORSER 

• 

5 
3 

!s 
o 

cr 

I 

r  n 

FOREIOK  COLLECT 

1 

s 

1 

- 

m 

- 

» 

M 

X 

• 

CHAPTER  IX. 

LENDING  THE  BANK'S  MONEY 

The  success  of  a  banking  undertaking  depends  alto- 
gether upon  the  loans.  Bank  profits  come  from  lending 
money — and  getting  it  back,  with  interest;  and  if  the  bank 
gets  neither,  it  fails  to  make  a  profit  and  suffers  loss.  There- 
fore the  department  of  loans  requires  the  greatest  care,  for 
here  credit  operations  will  take  place,  and  whatever  profits 
and  losses  accrue  in  the  course  of  the  year  will  be  due  to  the 
judgments  here  made. 

The  function  of  loaning  naturally  follows  that  of  de- 
posit, the  two  being  dependent  upon  one  another.  If  the 
bank  had  no  deposits,  it  would  have  no  funds  but  its  capital 
to  loan,  and  in  that  measure  would  prove  a  poor  investment. 
If  a  bank  could  continue  to  loan  by  crediting  its  loans  as 
deposits,  it  would  make  money,  provided  the  deposits  were 
not  subject  to  call;  but  inasmuch  as  deposits,  irrespective  of 
whether  they  are  the  proceeds  of  loans  and  discounts  or  not, 
are  payable  on  demand,  when  the  loans  are  out  of  propor- 
tion to  the  cash  in  hand,  inflation,  as  it  is  called,  obtains  and 
the  bank  is  in  a  weakened  state.  But  it  is  the  loan  itself  and 
not  the  granting  of  the  credit  that  we  now  consider,  the  im- 
portant subject  of  banking  credit  being  reserved  for  an- 
other chapter. 

LOANS  AND  DISCOUNTS  DISTINGUISHED 

Bank  loans  are  made  for  a  stated  period  of  time,  or  are 
payable  on  demand;  secured  or  unsecured.  In  the  nomen- 
clature of  banking,  a  loan  is  made  when  the  interest  is  paid 
periodically  or  at  the  time  the  loan  matures,  as  distinguished 
from  a  discount,  where  the  interest  is  taken  out  at  the  time 
the  loan  is  put  through.  Bankers  generally  speak  of  their 
"discounts"  as  the  notes  of  customers  they  have  bought  or 
discounted,  and  their  "loans"  as  the  advances  they  have  made 
to  their  customers.  Their  "bought  paper"  consists  of  loans 
made  through  brokers — commercial  paper.  Loans  are  also 
spoken  of,  when  referring  to  advances  made  on  collateral  and 

90S 


206  THE    PRACTICAL  WORK   OF   A   BANK 

payable  on  demand,  as  "call"  or  "street"  loans.  It  is  obvi- 
ous that  a  discount  must  be  a  loan  since  it  is  an  advance  of 
money;  but  a  loan  need  not  be  a  discount,  although  it  may 
be  made  so  by  taking  out  the  interest  in  advance. 

A  discount  may  be  based  altogether  upon  the  worth  of 
the  party  offering  the  paper  for  discount,  or  on  the  joint 
worth  of  indorser  and  maker;  while  the  loan  on  collateral 
would  be  based  largely  upon  the  value  of  the  collateral. 
The  borrower's  standing  may  remotely  affect  the  col- 
lateral loan,  but  in  the  last  analysis  the  lender  depends 
upon  the  security  pledged.  Loans  are  rarely  made  to  the 
full  value  of  the  collateral,  a  margin  being  left  for  shrinkage. 

Where  the  business  warrants  there  may  be  a  loan  de- 
partment charged  with  the  duty  of  following  all  loans  and 
keeping  watch  of  the  margin.  This  is  especially  true  of  the 
great  Wall  Street  banks  which  loan  millions  to  stock  ex- 
change brokers,  and  whose  margin  must  be  kept  good.  And 
where  the  market  is  fluctuating,  or  is  in  a  panicky  condition, 
this  department  must  keep  careful  watch  on  security  prices 
as  a  matter  of  protection  to  the  bank.  This  is  called  the 
"Loan  Department"  to  distinguish  it  from  the  "Discount 
Department"  which  handles  only  the  paper  of  customers  on 
their  indorsement.  The  loan  department  would  properly 
handle  all  loans  on  collateral  whether  on  stocks  and  bonds, 
warehouse  receipts,  or  other  forms  of  collateral. 

The  difference  between  secured  and  unsecured  loans  lies 
largely  in  the  fact  that  one  has  security  definitely  pledged, 
while  the  other  has  none,  other  than  the  names  and  credit 
standing  of  the  parties.  The  latter  cannot  be  watched  with 
the  same  degree  of  care  as  the  call  loan,  which  can  be  and  is 
given  constant  attention. 

LOANS  AND  CREDIT 

A  loan  is  a  present  advance  of  cash  or  credit  against  the 
belief  in  its  future  payment.  The  form  the  loan  takes  will 
depend  upon  the  maker's  desires.  It  may  be  a  cash  advance ; 
art  open  book  account ;  the  indorsement  of  a  note  ( a  loan  of 
credit) ;  the  giving  of  a  note,  or  the  acceptance  of  a  bill  of 
exchange.  But  when  the  loan  is  made,  or  the  credit  created, 
a  new  force  begins  to  work,  and  this  force  is  as  effective  in 
the  business  world  as  money,  and  is  cheaper. 


LENDING    THE    BANK'S    MONEY  207 

Banks  by  their  natural  tendency  to  collect  unemployed 
funds  become  reservoirs  of  capital;  and  by  the  exercise  of 
their  lending  powers  become  centers  of  credit  and  extin- 
guishers of  trade  indebtedness.  Their  power  to  cancel  in- 
debtedness, by  setting  off  debit  against  credit,  is  their  great- 
est usefulness  to  the  community  at  large.  This  power  we 
see  most  readily  in  the  clearing  function. 

The  ultimate  test  of  the  soundness  of  a  loan  is  its  ability 
to  liquidate  itself  at  maturity.  And  that  is  the  reason  why 
a  mercantile  loan  is  better  than  the  stock  excjiange  loan  and 
so  regarded  in  European  circles.  The  stock  exchange  loan 
can  only  be  liquidated  by  a  sale;  the  mercantile  loan  by  the 
process  of  consumption.  For  four  months  in  1914  there  was 
no  open  market  for  securities.  During  August,  September 
and  October  there  was  not  a  stock  exchange  open  in  the 
world.  You  could  not  get  a  quotation  from  any  public 
source;  you  could  not  sell  a  bond  or  a  share  of  stock  any- 
where in  the  world  except  by  a  private  bargain.  You  could 
not  publicly  offer  to  buy  or  sell.  There  was  no  "market" 
even  at  war  prices;  and  all  loans  based  upon  securities  were 
in  a  state  of  chaos,  with  no  hope  of  prompt  liquidation  and 
no  means  of  turning  into  cash.  But  a  loan  on  wheat,  or 
corn,  or  leather,  or  iron,  would  by  the  law  of  consumption 
soon  turn  itself  into  money;  for  although  the  world  had 
stopped  buying  stocks  and  bonds,  it  had  not  ceased  to  eat 
and  build  houses.  We  have  based  our  faith  on  the  stock 
exchange  loan  and  made  it  our  liquid  security,  which  it  is 
not  and  never  can  be;  for  in  critical  times  it  fails;  but  the 
merchandise  loan — the  loan  based  upon  an  exchange  of 
goods — redeems  itself,  war  or  no  war,  panic  or  no  panic. 

DEPOSITS  ARE  OFTEN  LOANS 

The  manner  in  which  a  bank  builds  up  its  deposits  by 
making  loans  may  easily  be  seen  from  the  following  illus- 
tration: Let  us  suppose  a  bank  has  capital  of  $100,000 
and  no  deposits.  It  begins  business  by  making  a  loan  to  a 
certain  individual  of  $10,000.  He  does  not  desire  the  cash, 
and  prefers  to  have  credit  on  the  books  of  the  bank  for  the 
amount,  with  the  privilege  of  checking  out  the  amount  as  he 
needs  the  money  to  pay  his  bills.  The  bank  now  has  de- 
posits of  $10,000.  Another  borrows  $10,000  and  deposits 

14 


208  THE    PRACTICAL   WORK   OF   A   BANK 

the  proceeds  of  the  loan  and  the  deposits  become  $20,000. 
The  bank  might  loan  its  whole  capital  this  way,  but  for  a 
provision  in  the  law,  national  as  well  as  State,  varying  only 
in  the  amount  required  and  not  in  the  principle  involved, 
and  known  as  the  reserve  requirement.  By  this  a  bank  is 
required  to  set  aside  in  cash  or  keep  on  deposit  with  ap- 
proved reserve  agents  a  portion  of  its  deposits,  running 
from  ten  to  sixteen  per  cent.,  depending  upon  the  nature 
of  the  obligation  created,  whether  time  or  demand,  the  place 
and  the  character  of  the  bank.1  The  danger  in  banking  may 
be  seen  from  the  extension  of  this  loaning  process. 

Let  us  suppose  that  a  bank  has  a  capital  in  cash  of 
$100,000  and  no  deposits.  It  must  set  aside  by  law  ten  per 
cent,  of  its  deposits  as  reserve.  It  begins  to  make  loans.  It 
loans  A  $20,000  (which  he  deposits)  and  it  sets  aside  $2,000 
as  reserve,  crediting  him  with  the  loan.  Let  us  assume  it 
puts  the  $2.000  in  a  vault  by  itself.  It  loans  B  $20,000,  set- 
ting aside  $2,000  more,  and  credits  B  with  $20,000.  It 
loans  C  and  D  $20,000  each  likewise,  setting  aside  $4,000, 
and  credits  the  amount.  There  is  now  in  its  reserve  $8,000, 
and  $92,000  of  its  capital  still  in  cash,  with  which  it  buys 
securities.  The  transaction  tabulated  will  look  like  this: 

Capital  Cash  to  loan                    Loans  Reserve  Deposited 

$100,000  $100,000                            

(A)$20,000  $2,000  $20,000 

98,000  (B)  20,000  2,000  20,000 

96,000  (C)  20.000  2,000  20,000 

94,000  (D)  20,000  2,000  20,000 

92,000 securities             . ....  (Cash  paid) 

$80,000  $8,000  $80,000 

The  balance  sheet  will  then  be: 

ASSETS  LIABILITIES 

Loans  and  discounts $80.000  Capital    $100,000 

Cash    8.000  Deposits    80,000 

Securities 92,000 


$180,000  $180,000 

-  If  only  A  and  B  ask  for  their  money  it  will  have  but 
$8,000  to  pay  $40,000  of  debts  created  by  crediting  its  loans 
as  deposits,  and  cannot  meet  its  engagements. 


under  "Reserves"  for  the  reserve  requirements  of  banks  in  the  Federal 
System  (page  135). 


LENDING    THE    BANK'S    MONEY  209 

By  experience  it  has  been  found  that  a  reserve  of  about 
twenty-five  per  cent,  is  ample  in  the  large  cities  to  carry  the 
banks  in  normal  times,  and  the  National  Banking  Act  so  re- 
quired; but  the  Federal  Reserve  Act  makes  the  proportion 
sixteen  per  cent,  which,  by  virtue  of  the  rediscount  machin- 
ery, is  considered  ample;  but  the  principle  is  the  same — a 
cash  fund  from  which  to  meet  the  daily  demands  of  the  de- 
positors. In  Europe  there  is  no  obligatory  reserve,  this  be- 
ing left  to  the  judgment  of  the  bankers;  and  how  much  re- 
serve to  carry  and  do  full  justice  to  the  bank  (the  reserve  is 
a  source  of  loss)  and  still  be  within  the  limits  of  safety  is 
the  art  of  banking. 

It  is  when  the  deposits  are  fictitiously  increased  by  mak- 
ing too  free  credits,  extending  credit  unwisely,  and  allowing 
the  reserve  to  decrease  until  it  becomes  out  of  proportion 
to  the  debts  that  danger  accrues.  We  then  have  inflation. 
It  has  been  ascertained  that  the  danger  point  under  past 
conditions  was  about  twenty-one  per  cent. ;  that  is,  when  the 
reserve  stood  at  about  twenty-one  per  cent,  for  the  country 
as  a  whole  it  was  too  low  and  loans  should  then  be  restricted. 
What  the  Federal  Reserve  Banks  will  do  in  alleviating  all 
such  reserve  evils  remains  to  be  seen. 


LIQUID  LOANS 

The  secret  of  sound  banking  is  to  have  a  steady  stream 
of  money  coming  in  by  way  of  maturing  loans,  so  that  the 
constant  stream  of  obligations  falling  due  daily  by  reason 
of  the  demands  of  the  checking  depositors  may  be  met.  A 
demand  obligation  cannot  be  met  by  a  time  security,  and 
only  as  the  bank  keeps  its  funds  liquid — that  is,  flowing  in 
and  out — can  it  meet  every  demand  made  on  it  without 
hardship. 

Banks  all  over  the  country  when  in  funds  send  them  to 
New  York  to  their  correspondents,  for  lending  in  the  market, 
or  on  deposit.  The  New  York  bank  may  lend  for  the 
country  bank's  account  in  the  market,  or  lend  for  its  own 
account,  and  pay  interest;  but  whatever  the  method,  the 
money  finds  its  way  into  collateral  loans  secured  by  stocks 
and  bonds,  and  when  money  is  plentiful  and  cheap  we  have 
an  era  of  speculation;  and  if  for  any  reason  the  loans  must 


210 


THE    PRACTICAL  WORK   OF   A   BANK 


be  called,  it  leads  to  a  sudden  contraction  of  credit  and  the 
whole  country  suffers.  The  fact  that  the  loan  can  be  called 
at  any  time,  and  in  the  event  of  failing  to  realize  upon  it,  the 
bank  may  sell  the  security,  is  in  a  sense  a  menace  to  the 
peace  of  mind  of  the  debtors. 

A  large  number  of  banks  make  loans  for  correspondents, 
using  the  same  care  as  with  their  own  loans.  Where  one 
bank  acts  as  an  agent  for  another  in  loaning  funds  it  is  only 

PAPER  DISCOUNTED  AND  OFFERED  FOR  DISCOUNT 

#•«*  ending 191 

PA1D$ ;_ M.  DISCOUNTED  $. :M. 


OFFERING    SHEET    AND    RECORD    OF    PAPER    DISCOUNTED 


required  to  use  the  ordinary  care  which  is  customary  in  the 
transaction  of  business  of  that  nature;  that  is,  the  bank  is 
not  a  guarantor. 

APPLYING  FOB  A  LOAN 

As  soon  as  a  request  for  a  loan  or  a  discount  is  made, 
the  credit  machinery  begins  to  work.  The  credit  department 
will  be  charged  with  obtaining  the  information  needed  to 
pass  upon  the  loan.  It  may  be  in  the  files,  or  it  may  have 
to  be  obtained.  If  the  offering  is  made  formally,  it  will  be 
on  an  "offering  slip."  It  may  be  in  an  offering  book.  If  it 
is  commercial  paper  offered  through  a  broker,  it  will  likely 
be  on  a  list  of  offerings  prepared  by  him,  and  submitted 
either  by  mail  or  by  representative. 

The  offerings  go  before  the  proper  officials,  either  the 


LENDING    THE    BANK'S    MONEY  211 

officers  or  the  discount  committee.  Usually  an  officer  is  des- 
ignated to  pass  on  the  offerings,  and  the  committee  sanctions 
his  judgment  either  by  attesting  the  offering  book  or  with 
some  mark  on  the  discount  register  to  indicate  their  approval 
of  the  loan.  Loans  are  sometimes  submitted  in  a  written 
report  to  the  board  and  ratified  by  making  the  offerings 
and  acceptances  part  of  the  board  records. 

COLLATERAL  LOANS 

If  the  maker  of  the  note  wishes  to  reinforce  his  credit, 
he  will  offer  the  bank  collateral,  i.  e.,  he  will  lodge  with  it 
certain  stocks  and  bonds  or  other  securities  to  support  the 
loan,  and  these  the  bank  may  sell  in  the  event  that  the  maker 
fails  to  pay  his  note  as  agreed  at  the  appointed  time.  We, 
therefore,  have  the  collateral  loan.  And  in  the  latter  case,  it 
is  not  the  borrower's  credit  that  is  the  pivotal  point,  but  the 
quality  of  the  collateral. 

The  collateral  loan  is  made  for  two  purposes:  First,  to 
allow  the  broker  (most  collateral  loans  are  to  brokers  and 
dealers  in  securities)  to  buy  and  sell  with  the  funds  of  the 
bank,  using  but  little  of  his  own  capital.  In  fact,  a  broker 
with  good  banking  connections  can  buy  and  sell  with  almost 
no  capital  at  all.  And  secondly,  to  permit  security  holders 
to  use  the  capital  invested  therein  for  a  time  (or  perma- 
nently) without  selling  the  security.  It  is  profitable  to 
borrow  on  a  bond  that  pays  five  per  cent,  at  two  or  three 
per  cent,  even  with  the  margin.  Thus  the  bond  pays,  say 
$50  interest  yearly.  The  owner  pledges  it  with  a  bank  for  a 
$900  loan  and  pays  four  per  cent.,  or  $36  a  year,  and  he  is 
$14  ahead  on  the  transaction.  He  has  had  the  use  of  part 
of  the  money  and  at  the  same  time  has  drawn  interest  on 
all.  Only  when  he  must  pay  more  than  five  per  cent,  will 
it  be  more  profitable  to  sell,  even  at  cost,  than  to  borrow. 
And  with  a  rate  of  two  per  cent,  possible  in  New  York  dur- 
ing ordinary  times,  to  pledge  a  bond  or  stock  that  nets  five 
per  cent,  and  only  pay  two  per  cent,  is  distinctly  profitable. 
By  our  system  of  centering  money  in  New  York  we  have 
specialized  in  Wall  Street  loans  and  made  them  the  liquid 
asset  of  the  country. 


212 


THE    PRACTICAL   WORK  OF   A   BANK 


B 


DEMAND 


Date 


Amount 

Rate 

/ 

Original 

Present 

COLLATERALS 

Price 

Value 

STREET  DEMAND 


Date, 


Amount 


Rate 


Original     Present 


COLLATERALS 


Price  Value 


LOAN    RECORD    CARDS 


LENDING    THE    BANK'S    MONEY  21S 

LISTED  AND  UNLISTED  SECURITIES 

In  making  a  collateral  loan  several  elements  enter,  the 
important  ones  being :  The  collateral,  what  is  it  ?  What  is  it 
worth?  Is  it  "straight"  or  "mixed";  listed  or  unlisted;  high 
grade  or  low  grade,  or  doubtful?  Has  it  a  ready  market, 
and  broad?  A  bank  president  when  urged  lo  equip  his  new 
building  with  a  vault  of  the  heaviest  armor  plate,  replied: 
"It  is  not  armor  plate  that  is  wanted,  but  a  vault  that  will 
keep  out  bad  collateral." 

Securities  pledged  as  collateral  are  of  two  main  classes: 
listed  and  unlisted.  The  former  includes  all  securities  dealt 
in  on  the  exchanges  whose  value  may  be  ascertained  from 
the  published  figures  of  stock  market  quotations.  Unlisted 
securities  are  those  that  are  dealt  in  on  the  "Curb,"  and, 
therefore,  quoted  in  the  curb  quotations,  and  those  other 
securities  issued  by  companies  and  corporations  everywhere, 
some  good,  very  good,  some  half  good  and  some  all  bad. 
Some  can  be  sold  in  a  few  hours,  or  in  a  few  minutes,  and 
some  couldn't  be  given  away.  This  is  not  to  say  that  unlist- 
ed stocks  are  all  bad  or  any  of  them  bad,  for  such  high-grade 
stocks  as  Standard  Oil  are  unlisted  and  are  of  the  very  best; 
but  the  reference  is  to  mining  stocks,  oil  stocks,  and  others 
of  like  character  whose  value  is  undeterminable  by  any 
process  known  to  the  banking  fraternity.  Municipal  bonds 
are  generally  unlisted,  except  a  few  issues  such  as  New  York 
City,  State  of  New  York,  Government  bonds,  and  the  like. 
But  a  mixture  of  quickly  salable  bonds  and  high-grade  ^ 
stocks  makes  the  most  desirable  collateral. 

The  unlisted  bonds  and  stocks  often  pay  interest  and 
dividends  regularly  and  are  of  intrinsic  value,  but  not  being 
listed  on  any  of  the  exchanges,  command  a  limited  market, 
so  that  in  times  of  stress  they  are  likely  to  join  that  class 
known  as  "indigestible."  To  handle  this  kind  of  collateral 
calls  for  keen  judgment,  for  otherwise  the  necessity  may 
arise  at  any  time  of  carrying  such  securities  for  a  long 
period  pending  an  opportunity  to  unload. 

Then  again  there  are  certain  good  listed  stocks  of  in- 
trinsic value,  but  with  only  a  moderate^  active  market,  the 
selling  price  of  which  may  be  materially  affected  if  any 
large  quantity  is  offered  for  sale.  The  question  of  mar- 
gin enters  quite  largely  into  consideration  in  making  loans 


SLOW  TIME 


No. 

Out 

Amount 

1 

Rate 

Due      .      ., 

Original 

Present 

COLLATERALS 

Price 

Value 

SLOW  TIME  DISCOUNTED 


Address 

Line     _              _t                                                        TOTAL  LOANS 

Required  Balances 

Loan  Dated 

Rate 

Due 

Amount 

Remarks 

Original 

COLLATERALS 

Present 

Receivables  Aggregating 

Margin  Required           % 

COLLATERAL     LOAN     RECORD     CARDS 


LENDING    THE    BANK'S    MONEY  216 

on  collateral  of  this  class,  and  it  should  be  the  policy  of  one 
finding  it  necessary  to  liquidate  such  loans  to  put  out  the 
securities  in  small  blocks. 


THE  MARGIN 

It  is  impossible  to  express  a  hard  and  fast  rule  governing 
securities  pledged  for  loans,  for  the  reason  that  the  nature 
of  the  loan  is  dependent  upon  the  contract  between  the  bor- 
rower and  the  lender.  As  a  general  rule  twenty  per  cent, 
margin  is  required  to  be  kept  good.  In  some  cases  even 
greater  margins  are  required.  Where  high-grade  bonds 
form  the  security  a  much  smaller  margin  is  exacted.  Dur- 
ing the  panic  days  of  1907,  forty  per  cent,  margin  was  in 
certain  cases  demanded  by  the  banks  on  loans.  Some  lend- 
ers insist  on  all  dividend-paying  railroads,  others  are  willing 
to  lend  on  various  mixtures  of  railroads  and  industrials,  and 
this  is  the  general  rule.  The  ordinary  Wall  Street  loan  is 
secured  by  about  sixty  per  cent,  railroads  and  forty  per  cent, 
industrials,  sometimes  half  and  half,  sometimes  seventy  and 
thirty  per  cent,  respectively,  and  sometimes  all  industrials. 
Generally  in  the  case  of  a  preponderance  of  industrials  a 
slight  advance  over  the  current  rate  of  interest  is  asked. 

The  reason  why  mixed  collateral  is  preferred  is  the  fact 
that  in  case  the  loan  has  to  be  called  and  the  security  sold, 
there  will  not  be  forced  on  the  market  a  large  quantity  of 
one  stock,  thus  depressing  the  price. 

On  securities  of  high  quality  a  less  margin  may  be  car- 
ried with  safety.  Thus,  on  a  New  York  City  bond,  a  loan 
may  be  made  up  to  nearly  the  full  face  value,  while  in  a  more 
speculative  stock,  a  larger  margin  is  necessary.  High-grade 
railroad  bonds  are  of  more  stable  nature  than  railroad  stocks, 
and  the  margin  in  one  case  would  be  less  than  in  the  other. 
In  times  of  stringency  and  market  activity  values  fluctuate 
widely  in  most  stocks,  particularly  the  active  stocks,  and  a 
wider  margin  is  required  if  safety  is  to  be  assured  than  if  a 
high-class  bond  were  pledged. 

In  Kirkbride  and  Sterret's  Modern  Trust  Company  it 
is  said:  "In  New  York  two  tests  are  applied  to  a  collateral 
loan,  the  first  requiring  that  the  value  of  the  securities  must 
have  a  margin  equal  to  twenty  per  cent,  above  the  amount 
of  the  loan,  and  the  second  that  the  loan  must  have  ten 


Form  822 


LOAN  AT 


To 


DATE  MADE 

DATE  DUE 

£ 

@ 

$ 

REMARKS: 


SECURITIES 


EXVELOPE    FOR    LOAN    COLLATERAL* 


916 


LENDING    THE    BANK'S    MONEY  217 


points  margin.  That  is,  the  amount  loaned  must  be 
per  share  less  than  the  market  value  of  the  stock.  This  is 
reckoned  by  dividing  the  number  of  shares  of  stock  (or  if 
bonds  $10,000  are  equivalent  to  one  hundred  shares  of 
stock)  into  the  margin. 

"For  example,  if  there  were  2,000  shares  of  mixed  stock 
in  a  loan  of  $100,000,  divide  this  number  of  shares  into  $20,- 
000  (the  twenty  per  cent,  margin)  and  the  result  shows  the 
average  margin  of  ten  points  on  each  share  held. 

"If  the  ten-point  rule  is  strictly  adhered  to  it  has  the 


3 


SHREVEPORT.  LA.          -  ^  -  191. 


,  the  dsnen,  endarxn.  turerJet.  and  all  of  of,  to  soldo,  promtoe  to  pa>  tothe  order  of 
~&  TRUST  COMPANY,  *  «»«*•  *>»•*«  •»»«  taShre«port,  LouUana.  the  mm  of 

DOLLARS 

—•==»- 

fa  value  received.  v*k  Interest  thereon,  at  the  rate  of  eight  per  cent  per  I 

This  note  Is  secured  by  pledge  and  delivery  ofr  the  securities  mentioned  on   the   reverse   hereotj 
JIDDITIONAL   SECURITIES,   utlifactory    to   the   holder   of   this    nole.    to   cover   such   decline,     t 

Should  this  note  not  BE  PAID  AT  MATURITY,   or  whe[>  It   BECOMES  DUE    by    failure 

hall  be  applied   ( 


TRUST  COMPANY, 
sentatlon  (or  payrn< 

DUE    ^|f 


aald  CONT 
urltloi  at  theli 
D  due  as  aboTe. 

irney   for   col 


i  It  b«  otherwise  -p. 


COLLATERAL   TIME    KOTE 


effect  of  discriminating  against  low-priced,  non-dividend- 
paying  stocks,  while  the  twenty  per  cent,  clause  requires  an 
ample  margin  on  high-priced  stocks.  There  are  a  few  in- 
stitutions in  New  York  that  require  nearly  fifteen  points 
with  the  twenty  per  cent,  margin,  and  some  which  do  not 
adhere  strictly  to  the  ten  per  cent,  requirement." 

The  usual  margin  required  is  from  twenty  to  twenty-five 
per  cent. ;  that  is,  on  a  hundred  dollars'  worth  of  stock  from 
seventy-five  to  eighty  dollars  would  be  loaned. 

"WATCHING  THE  TICKER" 

In  a  large  and  active  bank  making  a  specialty  of  collat- 
eral loans,  there  is  careful  watch  kept  over  all  securities  on 
which  the  bank  loans.  In  a  room  with  a  stock  ticker  and 
other  news  agency  reports  there  is  a  clerk  who  has  a  record 


218  THE   PRACTICAL  WORK  OF   A  BANK 


N  E\V    YOR K , 


.......,....™.... .....-.......-..._...- ...- ._ .— ...__....„„... after  date    without  grace,  tlie  undersigned,  for 

value  received,  promise  to  pay  to  the  Guaranty  TfUSt  Company  Of  New  York,  or  order, 
at  the  office  of  said  Trust  Company  in  tlie  City  of  New  York,  in  funds  current  at  the  New  York  Clearing  House, 

•with  interest  at  the  rate  of per  cent  per  annum,   payable  quarterly  on  the  first  days  of 

January,  April,  July  and  October,  having  deposited  with  said  Trust  Company  as  collateral  security  for  the  payment 
of  this  or  any  other  liability  or  liabilities  of  the  undersigned  to  the  Trust  Company,  due  or  to  become  due,  or 
which  may  hereafter  be  contracted  or  existing,  including  as  well  promissory  notes,  bills  of  exchange,  and  other 
evidences  of  indebtedness  made,  endorsed  or  accepted  by  the  undersigned  and  purchased  or  owned  by  the  Trust 
Company,  the  following  property,  viz.: 


The  undersigned  hereby  agree to  deposit  with  the  Trust  Company  such  additional  collateral  security 

as  the  Trust  Company  may  from  time  to  time  demand ,  and  also  hereby  give to  the  Trust  Company  a  lien  for 

the  amount  of  all  the  liabilities  aforesaid  upon  all  the  property  of  the  undersigned  at  any  time  coming  into  the 
possession  of  the  Trust  Company,  and  also  upon  any  balance  of  the  deposit  account  of  the  undersigned  with  the 
Trust  Company. 

On  the  non-performance  of  the  foregoing  agreements  as  to  furnishing  additional  collateral,  or  upon  t!ie 
non-payment  of  any  of  the  above-mentioned  liabilities,  then  and  in  either  such  case  the  Trust  Company  is  hereby 
authorized  to  sell,  assign  and  deliver,  the  said  property,  or  any  substitutes  therefor,  or  any  additions  thereto,  or  any 
such  other  property,  at  such  time  or  times  and  in  such  several  parts  or  parcels  as  the  Trust  Company  or  either  of  its 
officers  may  decide,  and  to  sell  the  whole  or  any  of  said  parts  or  parcels,  either  at  any  broker's  board,  or  at  public  or 
private  sale,  either  for  cash,  upon  credit  or  for  future  delivery,  at  the  option  of  the  Trust  Company,  or  of  any  of  its 
officers,  without  advertisement,  or  notice,  which  are  hereby  expressly  waived.  Upon  the  non-payment  or  the  non- 
fulfillment of  any  of  the  conditions  of  this  note,  then  the  whole  or  any  designated  part  of  the  liabilities  of  the 
undersigned  to  the  Trust  Company  shall  mature  at  the  election  of  the  Trust  Company  by  presentation  thereof  for 
payment.  In  case  of  any  sale  by  the  Trust  Company,  of  any  of  said  property  on  credit  or  for  future  delivery,  the 
property  sold  shall  be  retained  by  the  Trust  Company  until  the  selling  price  is  paid  by  the  purchaser,  but  the  Trust 
Company  shall  incur  no  liability  in  case  of  failure  of  the  purchaser  to  'ike  up  and  pay  for  the  property  so  sold.  In 
case  of  any  such  failure  the  property  may  be  again  sold.  At  any  sale  hereunder  the  Trust  Company  may  itself 
purchase  the  whole  or  any  part  of  the  property  sold,  free  from  all  right  of  redemption  on  the  part  of  the  under- 
signed, .  which  is  hereby  waived  and  released.  In  the  ease  of  any  sale  the  Trust  Company  may  first  deduct  all  the 
expenses  for  collection,  sale,  and  delivery  of  the  property  so  sold,  and  any  other  expenses  incurred  by  the  Trust 
Company  in  connection  with  such  sale;  and  may  then  apply  the  residue  to  any  one,  or  more,  or  all,  of  the  said 
liabilities,  whether  due  or  not  due,  returning  the  overplus,  if  any,  to  the  undersigned,  who  shall  remain  liable  to  the 
Trust  Company  for  any  deficiency  arising  upon  any  such  sale.  The  undersigned  do  hereby  further  authorize 
the  Trust  Company  at  its  option  at  any  time,  to  appropriate  and  apply  to  the  payment  of  any  of  said  liabilities, 
whether  now  existing  or  hereafter  contracted,  auy  and  all  moneys  or  other  property  now  or  hereafter  in  the  hands  of 
the  Trust  Company  on  deposit  or  otherwise,  to  the  credit  of  or  belonging  to  the  undersigned,  whether  the  said  liabilities 
are  then  due  or  not  due.  The  undersigned  further  agree  that,  upon  any  transfer  of  this  note,  the  Trust  Company 
may  deliver  the  property  held  as  security,  or  any  part  thereof,  to  the  transferee,  who  shall  thereupon  become  vested 
with  all  the  powers  and  rights  above  given  to  the  Trust  Company  in  respect  thereto,  and  the  Trust  Company 
shall  thereafter  be  forever  relieved  and  fully  discharged  from  any  liability  or  responsibility  in  the  matter. 

COLLATERAL    XOTE 

of  all  collateral  loaned  upon  and  the  price  at  which  the  loan 
was  made  and  the  name  of  the  borrower.  As  changes  occur 
in  the  market,  notation  is  made  and  when  the  margin  gets 
too  close  additional  security  is  called  for. 

THE  BORROWER 

The  second  element  to  consider  is  the  standing  of  the 
borrower.    If  the  borrower  is  doubtful,  the  bank  may  have 


LENDING    THE    BANK'S    MONEY  219 

to  sell  its  collateral,  and  this  it  does  not  desire  to  do.  It 
makes  a  loan  hoping  to  receive  the  funds  back.  It  does  not 
want  the  proceeds  of  collateral.  It  dislikes  to  go  on  the  auc- 
tion block.  If  not  reliable,  the  borrower  may  skirmish  for 
time,  and  find  some  technicality  to  prevent  a  sale.  It  may 
mean  trouble,  and  trouble  the  bank  does  not  want. 

TITLE  TO  THE  COLLATERAL — "GOOD  DELIVERY" 

It  is  important  that  title  to  the  collateral  be  vested  in  the 
borrower  and  that  it  be  conveyed  in  proper  form  to  the 
bank,  so  that  it  becomes  "good  delivery" — that  is,  will  be 
transferred  upon  the  books  of  the  issuing  corporation  or  its 
fiscal  agent.  The  rules  of  the  New  York  Stock  Exchange 
are  said  to  be  the  most  strict  of  any  in  the  country  and  if 
transfer  is  in  accordance  therewith,  it  will  probably  pass 
anywhere.  If  title  is  defective  the  bank  will  have  trouble  in 
collecting  its  money.  If  it  holds  bogus  stocks  and  bonds  it 
has  no  collateral  at  all.  What  is  good  delivery  depends 
upon  the  usages  of  the  trade  and  the  rules  and  regulations  of 
the  stock  exchange  in  listed  securities,  and  in  the  case  of  un- 
listed securities,  the  rules  and  regulations  of  the  issuing 
company. 

Certificates  of  stock  received  as  security  should  be  dated, 
signed,  sealed  and  duly  attested  by  the  registrar.  Powers  of 
attorney  upon  the  back  of  certificates  should  be  carefully 
filled  in,  leaving  the  name  of  attorney  and  of  the  party  to 
whom  the  transfer  shall  be  made  in  blank. 

The  signature  to  the  power  must  correspond  with  the 
name  upon  the  face  of  the  certificate  and  should  be  wit- 
nessed. Bonds  offered  as  collateral  should  be  closely 
scanned  to  note  if  registered.  If  so,  power  of  attorney  must 
accompany.  Signature,  date,  seal  and  next  maturing 
coupon  must  all  be  in  place. 

FORM  OF  COLLATERAL  NOTE 

To  those  who  are  in  the  habit  of  handling  stocks  and 
bonds,  7't  may  seem  superfluous  to  consider  for  a  moment 
any  questions  pertaining  to  the  form  of  note  or  power  of 
attorney  used  in  connection  with  collateral  loans;  but  we 


220  THE    PRACTICAL   WORK   OF    A    BANK 

shall  take  it  for  granted  that  there  are  some  to  whom  a  few 
suggestions  will  not  go  amiss. 

The  form  of  note  should  provide  for  a  call  of  margin, 
with  the  privilege  to  sell  the  collateral  in  event  of  the  failure 
of  the  borrower  to  maintain  the  margin.  It  is  also  advisable 
to  have  a  clause  in  the  obligation  to  cover  any  direct  or 
contingent  liability. 

Care  should  be  taken  in  the  execution  of  the  power  of  at- 
torney in  order  that  certificates  of  stock  may  be  a  good  de- 
livery; the  name  of  a  bank  or  any  of  its  officers  should  not 
be  included  in  the  assignment,  either  as  transferee  or  at- 
torney. The  signature  to  assignments  must  be  technically 
correct;  i.  e.,  it  must  correspond  with  the  name  as  written 
upon  the  face  of  the  certificate  or  bond  in  every  particular, 
without  alteration  or  enlargement  or  any  change  whatever. 

Several  powers  of  attorney  should  be  required  when  a 
large  block  of  stock  is  pledged,  as  considerable  difficulty 
may  arise  in  selling  the  collateral  if  the  whole  block  must  be 
sold. 

It  should  be  the  habit  of  the  one  intrusted  with  the  hand- 
ling of  collaterals  to  daily  follow  quotations  closely,  and  yet 
there  are  many  instances  where  sales  are  "washed"  to  bolster 
values  and  consequently  create  fictitious  quotations ;  general- 
ly, however,  the  public  expression,  as  represented  by  sales  on 
the  stock  exchange,  is  a  good  barometer  of  actual  values. 

To  those  who  desire  to  become  competent  to  look  after 
the  collaterals  I  would  advise,  in  the  first  place,  careful  read- 
ing of  the  best  newspapers  and  journals,  whose  equipment  is 
especially  adapted  to  wants  of  investors,  and  secondly,  actual 
contact  in  the  practical  work  of  the  department  wherein  you 
get  accustomed  to  handling  the  various  stock  certificates, 
bonds,  etc.2 

TIME  LOANS 

Aside  from  the  demand  note,  there  are  two  main  forms 
of  notes  used  in  banking,  the  first  of  which  promises  to  pay 
a  certain  sum  a  specified  number  of  days  or  months  after 


zLouls  N.  Spielberger  in  The  Bankers  Magazine. 


LENDING    THE    BANK'S    MONEY  221 

date.  The  other  promises  to  pay  the  amount  on  a  certain 
date.  In  the  first  case  the  maturity  must  be  figured,  and 
due  allowance  made  for  the  different  rules  regarding  Satur- 
days, Sundays  and  holidays  in  the  different  States,  as  well 
as  days  of  grace,  now  fast  becoming  a  thing  of  the  past,  as 
they  should  be.  Notes  are  usually  made  payable  at  some 
bank  and  must  be  presented  there.  Bankers'  guides  are  pub- 
lished giving  the  laws  of  the  States  regarding  grace,  pro- 
test, holidays,  etc.,  for  use  in  timing  notes.  These,  of  course, 
are  part,  and  a  necessary  part,  of  every  bank's  outfit. 

THE  BOOKKEEPING  OF  THE  LOAN 

As  soon  as  the  loan  or  the  discount  is  accepted  the  loan 
records  begin  to  take  shape.  The  note  must  be  made  out 
and  signed.  If  it  is  already  in  signed  form,  as  in  the  case  of 
a  discount,  it  must  be  properly  indorsed.  If  it  is  a  collateral 
note  with  finely  printed  terms,  the  bank  will  insist  that  the 
note  be  on  its  own  form.  If  securities  are  to  be  delivered, 
they  must  be  brought  in  and  examined. 

Having  the  note  in  hand  we  must  determine:  when  it 
matures;  the  value  at  maturity,  including  interest,  if  inter- 
est is  to  run;  the  time  in  days  until  day  of  payment,  for  in- 
terest calculations;  the  interest  or  the  discount,  and  the  pro- 
ceeds. Having  determined  the  proceeds  the  amount  is  cred- 
ited to  the  customer,  the  interest  to  interest  account,  and  the 
face  amount  charged  to  loans  and  discounts.  Tickets  for 
the  various  entries  are  sent  to  the  several  departments;  or 
in  the  case  of  a  small  bank  put  through  the  journal  records. 
We  have  thus  kept  the  equilibrium  heretofore  mentioned, 
for,  supposing  the  note  to  be  for  $100,  six  months  to  run,  at 
six  per  cent.,  we  would  credit  the  depositor  $97,  interest  $3, 
and  charge  discounts  $100,  maintaining  the  balance. 

In  timing  the  item,  the  due  date  is  placed  upon  it  in 
some  conspicuous  place,  generally  provided  for  in  notes.  If 
interest  is  to  be  added  this  is  figured  and  noted  usually  over 
or  under  the  figures  in  red  ink. 

If  cash  is  paid  for  the  loan,  cashier's  check  is  drawn, 
New  York  draft  issued,  or  the  cash  itself  may  be  paid.  But 
the  more  frequent  way  in  the  case  of  home  loans  would  be 
to  pass  the  same  to  the  credit  of  the  borrower.  But  in  buy- 


222 


THE    PRACTICAL  WORK  OF   A   BANK 
DISCOUNT 


DATE  OF  -NOTE 

Our 

Number 

Tbelr 

DRAWER  OR  MAKER 

DRAWEE  OS  ENDORSER 

WHERE  PAVABLZ 

ni 

02 

03 

:  04 

,    05, 

1 

DISCOUNT 


ing  commercial  paper,  draft  is,  of  course,  sent  to  the  broker 
in  payment  of  the  paper  purchased. 

It  is  important  that  the  laws  of  the  various  States  as  to 
holidays  be  known  in  timing  notes,  for  while  days  of  grace 
are  generally  abolished,  holidays  differ  and  the  laws  relative 
to  presentment  of  paper  are  not  uniform.  In  some,  the 
paper  is  due  the  day  before  a  holiday  and  in  others  the  day 
after.  Paper  due  on  Sunday  is,  as  a  rule,  payable  on  Mon- 
day. The  uniform  Negotiable  Instruments  Act  will  be  a 
safe  guide  in  this  respect. 

The  next  step  is  to  enter  the  item  on  the  discount  register 
—the  "history  book"  of  the  discount  department — recording 
as  one  banker  puts  it  "the  birth  of  every  loan  and  its  death." 

The  loan  register  contains  full  details  as  to  maker,  in- 
dorser,  date,  time,  where  due,  maturity,  amount,  rate  of 
interest,  interest  or  discount,  exchange,  and  other  details  that 
are  necessary  to  completely  describe  the  paper. 

This  discount  register  is  a  book  of  original  entry  and 
constitutes  one  of  the  most  important  records  of  the  bank. 

MATUEITY  RECORD 

Record  is  also  kept  of  the  maturity  of  the  loans  by  a 
maturity  register,  which  classifies  the  notes  according  to  due 
dates.  After  entry  on  the  discount  register,  it  is  entered  on 
the  maturity  book,  first  that  it  may  have  attention  when  due, 
and  also  to  ascertain  how  much  is  maturing  each  day  for 
reinvestment  purposes.  By  referring  to  this  book,  the  loan 
or  discount  department  may  tell  at  a  glance  what  notes  are 
coming  due,  and  how  much  will  be  in  hand  for  reinvestment. 
From  this  record  notes  are  turned  over  to  the  collection  de- 
partment for  collection,  if  not  presented  by  the  loan  or  dis- 
count department  through  messengers.  The  maturity  book 


LENDING    THE    BANK'S    MONEY 
REGISTER 


228 


TIME 

When 

Discounted 

WHEN  DUE 

AMOUNT 

Dj"1> 

AMOUNT  PA!D 

WHEN  PAID 

REMARKS* 

REGISTER 


is  a  most  important  record,  for  it  checks  the  notes  falling 
due,  and  keeps  the  payments  up  to  date.  Presentment  is  a 
most,  if  not  the  most,  important  detail  in  the  discount  de- 
partment, and  failure  to  present  a  note  may  lead  to  losses. 
Simpler  things  than  this  have  brought  litigation,  and  some 
debtors  are  only  too  glad  for  an  opportunity  to  escape 
liability. 

When  the  loan  is  properly  recorded,  and  classified  as  to 
due  date,  it  is  filed  in  a  document  case,  constructed  espe- 
cially for  this  purpose,  and  divided  into  days  and  months. 
Special  trucks  are  sometimes  provided  for  these  maturity 
records,  the  truck  being  wheeled  into  the  vault  at  night.  The 
notes  therein  contained  are  exceedingly  valuable,  for  if  lost 
or  destroyed  endless  confusion  would  result. 

It  is  suggested  that  the  bank's  own  paper — paper  of  its 
own  customers  running  to  it — be  kept  in  another  ink  to  dis- 
tinguish from  the  paper  of  customers  discounted  for  them. 

THE  BORROWER'S  LIABILITY 

Thus  far  we  have  discounted  the  note,  sent  the  credits 
and  the  debits  to  the  proper  departments,  or  made  the  prop- 
er entries,  informed  ourselves  when  to  look  for  payment, 
and  there  remains  to  discover  how  much  the  discounter  or 
borrower  owes  on  similar  obligations.  This  is  recorded  on 
liability  cards  or  ledgers,  the  record  including  what  the  party 
owes  directly  and  contingently  to  the  bank,  and  is  a  useful 
and  necessary  part  of  the  bank's  information  in  making 
loans. 

It  becomes  exceedingly  important  that  the  bank  follow 
the  law  in  the  matter  of  loans,  in  that  it  shall  not  lend  to 
any  one  party  or  interest  more  than  a  certain  percentage  of 
its  capital,  or  capital  and  surplus.  The  law  is  strict  in  this 

15 


224 


THE    PRACTICAL  WORK  OF   A   BANK 


LOAN   DEPARTMENT— PROOF  SHEET 

For 191 


DBBITS 

Folio 

ACCODNI 

CKBDITS 

Debit  Clerk 

Credit  Clerk 

Collection  Department 

Coupon  Department 

Paying  Teller 

Receiving  Teller 

Trust  Department 

Reorganization  Department 

Securities  Department 

Foreign  Department 

Total  Departmental  Balance! 
Demand  Loans 

Time 

Bills  Purchased 

Customers'  Loam 

Accrued  Interest  Receivable 

Expenses 

Interest  Due  Customers 

Customers'  Collateral 

Commissions 

Treasurer's  Checks 

Fifth  Avenue  Branch 

Loan  Balances  • 

Demand                           t 

T!m«                                *    . 

11 

PROOF   SHEET LOAN    DEPARTMENT 


and  must  be  obeyed,  for  many  banks  have  come  to  grief 
through  overloaning  to  one  party,  and  it  is  both  good  bank- 
ing and  good  business  to  scatter  the  risks,  and  not  put  too 
many  eggs  in  one  basket. 

The  discount  register  will  show  how  much  the  bank  has 


LENDING    THE    BANK'S    MONEY 


225 


LOCATION 
NAME. 


ACCOUNT  OPENED 


UUUm  

..         . 

LOA  „(...„. 

-0»T.) 

IO.N  <,..„. 

«o»r«) 

PCBAUAHY 

MARCH 

APP.lt 

JUKI 

AUGUST 

SCPTCMBCH 

OCTOBER 

AVERAGE    BALANCE    AXD    AVERAGE    LOAN    CARD 

loaned,  but  it  does  not  show  how  much  to  A,  B  and  C,  and 
we  must,  therefore,  segregate  these  items  so  that  the  liability 
of  each  borrower,  direct  and  contingent,  shall  be  known. 
This  is  important,  not  only  that  the  law  may  be  obeyed,  but 


UNION  BANK  &  TRUST  CO..  JACKSON.  TK* 


LIABILITY  LEDGER 


also  that  the  bank  may  be  within  the  limits  of  safety;  and 
unless  it  can  follow  the  changing  liability  of  the  borrower 
from  day  to  day  will  be  all  at  sea  as  to  its  risks.  This  lia- 
bility is  of  three  classes:  (a)  Direct;  (b)  as  indorser,  and 
(c)  as  discounter.  With  a  system  of  recording  this  liability 


Into 

raDO&SIR  FOR 

1« 

r.t 

IUi 

**• 

»•; 

z 

hi, 

J.J 

S.H. 

M 

Z 

Dr. 

TUP.       . 

fin. 

i 

4* 

fedora 

ir 

OK1URIS 

T.TABU.TTY    TJOOK 


LENDING  THE  BANK'S  MONEY 


227 


»«rAior                me  federal  litle  &  Trust  Co.            «^,A&&B- 

No                                                                                                OF  BEAVER  FALLS.  PA. 

Date  Purchased                                                                    Maker 

»-£ 

First  Purchased                                                                       Number                                          Amount.  J 

Renewed  by  Number                                                Purchased  from 

Where  Payable                                                                   Address 

B*TI  OF  WCH                                      TIKI                                  MT«                                      F»Cl                                        IHTOKT                                   HIT  AUOUHT 

* 

COttATlllAL  1]  HOKT.  |        .^  M    .NTIR1ST      |  MOUNT      |  a.L.NCl  

^K 

^™  ^^W 

^^^ 

LIABILITY  SHEET 

The  above  liability  sheet  is  used  in  a  manifold  system  with  different  colored 
sheets,  the  record  being  made  by  one  operation.  The  original  is  the  direct  liability, 
the  first  copy  the  maturity  sheet,  the  third  the  discount  register,  and  the  last 
the  contingent  liability.  As  soon  as  a  note  is  recorded  the  sheets  are  filed  in 
their  respective  binders.  The  liability  ledger  is  indexed  alphabetically,  sub- 
divided further  if  desired.  The  direct  as  well  as  the  contingent  liability  sheet 
is  filed  under  proper  division.  The  sheets  constituting  the  discount  register  are 
listed  on  the  recapitulation  sheet  and  the  total  charged  in  the  day's  business  on 
the  journal. 

The  sheets  for  the  different  bills  purchased,  together  with  recapitulation, 
are  filed  in  the  discount  ledger  until  removed.  The  maturity  sheets  are  filed 
according  to  due  date,  and  a  statement  taken  at  any  time  from  the  maturity 
tickler  will  indicate  the  aggregate  of  the  loans. 

At  the  beginning  of  the  day's  business  the  sheets  are  taken  from  the  maturity 
tickler,  then  from  the  liability  ledger,  both  direct  and  contingent  sheets  being 
removed,  and  all  attached  to  the  note  falling  due.  As  soon  as  the  item  is  paid 
or  renewed  the  sheets  are  pinned  together  and  filed  on  a  check  file,  and  at  the 
close  of  the  day's  business  are  listed  on  the  recapitulation  sheet  and  the  totals 
parried  to  the  journal.  The  sheets  are  then  filed  in  their  transfer  binders. 


the  bank  can  tell  at  a  glance  how  much  its  borrowers  are 
indebted  to  it. 

A  liability  book  is,  therefore,  kept,  showing  how  much 
each  borrower  is  indebted  to  the  bank,  directly  and  indirect- 
ly, and  the  bank  can  ascertain  at  any  time  just  how  much 
risk  it  is  carrying  with  one  person,  firm  or  corporation.  The 
risks  might  still  be  further  divided  in  classes  of  dealers,  it 
being  good  banking  to  have  many  rather  than  a  few  baskets 
in  which  to  carry  the  eggs.  A  good  bank  would  not  and 


228  THE   PRACTICAL  WORK  OF   A   BANK 


Guaranty  Trust  Company  of  New  York 

Fifth  Avenue  Branch  140  Broadway  London  Office 

Fifth  Avenue  and  4Srd.  Stwrt  33  Lombard  Street,  B.  C. 

New  York, .....  191 


Dear  Sirs: 

We  beg  to  advise  the  following  substitutions,  which  were  made  to-day  in  your 

loans,  as  listed  below: 

Yours  very  truly, 

Guaranty  Trust  Company  of  New  York 

W.  C.  EDWARDS,  Treasurer 

By 


NOTICE  OF   SUBSTITUTIONS   IN    COLLATERAL  LOAN 

should  not  loan  all  its  funds  to  a  single  line,  such  as  milli- 
nery, dry  goods,  leather,  manufacturers,  etc.,  for  many  a 
bank  has  gone  down  by  not  heeding  the  truth  of  the  maxim 
above  quoted. 

Some  banks,  in  order  to  keep  track  of  their  collateral 
loans,  have  an  index  arrangement  showing  how  much  they 
have  loaned  on  each  class  of  stocks  or  bonds,  and  to  whom 
the  loan  is  made.  This  is  to  prevent  a  bank  from  becoming 
overloaned  on  one  particular  stock.  But  a  good  loan  clerk 
will  at  least  keep  a  mental  memorandum  of  the  prevalence 
of  a  certain  stock  and  guide  his  actions  accordingly. 

In  collateral  loans  the  note,  properly  executed,  should  be 
placed  in  a  heavy  manilla  envelope.  On  the  envelope  is  re- 
corded the  number  of  the  loan,  borrower's  name,  date, 
amount,  rate  per  cent.,  a  full  description  of  the  securities 
and  the  value.  The  value  should  be  kept  in  lead  pencil,  so  it 
can  be  readily  changed.  All  envelopes  are  filed  alphabeti- 
cally. A  record  of  the  loan  is  also  made  in  a  loan  book, 


LENDING    THE    BANK'S    MONEY  229 

which  is  an  account  of  each  day's  loans.  This  book  goes  to 
the  board  of  directors  for  their  examination.  A  record  is 
also  made  on  a  card,  which  is  practically  a  duplicate  of  the 
envelope,  except  there  are  spaces  for  the  change  in  interest 
rates,  and  for  part  payments.  This .  information  may  be 
kept  on  the  envelope  if  desired. 


SUBSTITUTIONS 

In  collateral  loans  substitutions  are  allowed  from  time 
to  time,  as  the  stocks  are  sold  and  others  bought.  When  a 
broker  sells  stocks  he  must  deliver  them,  and  if  he  has  them 
on  loan  he  withdraws  them  from  the  loan  and  substitutes 
others.  The  loan  clerk  is  f  amiliar  with  the  terms  of  the  loan, 
knows  what  stocks  to  accept  and  what  to  reject  to  keep  the 
margin  good,  and  follows  the  trend  of  the  market  closely,  so 
that  the  margin  will  be  maintained  at  all  times.  In  his  de- 
sire to  make  money  for  the  bank,  he  must  analyze  with 
minute  care  stocks  that  have  a  narrow  market,  stocks  that 
are  subject  to  wide  fluctuations  and  stocks  of  doubtful  in- 
trinsic value  brought  into  prominence  through  manipulation. 
If  stocks  of  this  description  are  accepted  by  the  loan  clerk 
he  should  see  to  it  that  they  form  only  a  small  percentage  of 
the  collateral.  In  making  substitutions,  "substitution 
sheets"  are  used.  These  are  filed  with  the  securities  and 
show  the  authority  for  making  changes  in  the  loan  collateral. 

As  substitutions  are  made  they  are  added  and  the  old 
records  crossed  off.  If  only  part  of  the  securities  are  re- 
moved, the  figures  are  changed.  The  intent  of  the  record  is 
to  keep  track  of  all  the  securities  held  on  the  loan  and  that 
the  list  shall  be  as  in  the  envelope  and  the  market  values 
shown  either  on  a  card  or  on  the  envelope  itself. 

Collateral  loans  are  made  frequently  through  brokers. 
As  soon  as  the  bank  ascertains  what  it  will  have  to  loan  for 
the  day,  after  receiving  the  morning's  clearings,  it  will  com- 
municate with  brokers  and  off er  them  funds  at  certain  rates ; 
or,  it  may  place  the  same  in  the  hands  of  brokers  on  the 
stock  exchange  floor  to  be  loaned  out  to  clients,  the  borrower 
paying  a  small  commission  for  the  favor. 


280  THE    PRACTICAL   WORK   OF    A   BANK 

WHEN  THE  DUE  DATE  ARRIVES 

When  the  due  date  arrives,  the  note  must  be  paid,  or  re- 
newed, and  it,  therefore,  follows  that  we  must  turn  it  into 
money  or  into  a  new  obligation.  Custom  decrees  that  makers 
be  given  ten  days'  notice  of  maturing  paper  and  it  is  neces- 
sary that  the  maturing  notes  be  sent  to  the  correspondent 
for  collection  in  due  time  so  that  such  notice  may  be  given. 
In  the  case  of  home  paper,  of  course,  the  notices  can  be  sent 
each  day  for  the  maturities  of  ten  days  in  advance.  By  con- 


0* 


[VJ     &4 
I 


We  hold  your  Note  Jor  $     1,000.00 

Which  will  be  due        May  22,  1913  Interest,  $          20.00 

£^rW^  John  Jones  &  Coll  Totaf*       $     1,020100 


8 

SSi 

Mr.   Jas.  Smith, 

1014  Texas  Street, 
City. 

i 


NOTICE    TO    BORROU'ER    OF    MATURING    XOTE 


suiting  the  maturity  tickler  out-of-town  items  may  be  for- 
warded and  notation  made  in  the  proper  space.  Some  banks 
keep  the  foreign  items  separately. 

In  clearing-house  cities  notes  due  are  sent  through 
the  clearing-house,  unless  by  custom  they  are  collected  by 
messenger.  For  instance,  in  Boston,  notes  of  over  $2,500  are 
presented  through  messengers,  while  under  that  amount 
through  the  clearing-house. 

Notes  paid  or  charged  to  the  customer's  account  are  cred- 
ited to  bills  receivable,  and  the  balance  of  the  liability  regis- 
ter, maturity  tickler  and  total  of  the  notes  themselves  should 
agree  with  the  balance  of  the  controlling  account  on  the  gen- 
eral ledger.  Items  in  the  form  of  notes  sent  out  for  collec- 


LENDING    THE    BANK'S    MONEY  281 

tion  are  charged  to  the  collection  department  as  any  other 
collection.  Notes  falling  due  in  other  places  may  be  charged 
to  the  bank  to  which  they  are  sent,  to  be  charged  back  if  not 
paid,  if  the  bank  be  a  correspondent,  or  charged  to  the  tran- 
sit account  as  a  collection  item  to  be  collected  and  credit 
passed,  or  sent  out  on  memorandum.  As  soon  as  the  note 
leaves  the  loan  department  it  is  credited  to  the  bills  receiv- 
able account,  and  charged  to  "collections"  or  "transit  ac- 
count," and  when  payment  is  made  or  credit  passed  upon 
advice  of  payment,  the  transit  account  or  collection  account 
is  credited,  and  the  collecting  bank  charged. 

In  discounting  notes  payable  out  of  town,  the  exchange 
is  taken  out  at  the  time  of  discount,  and  is  no  longer  a  charge 
against  the  collection  of  the  note.  If  the  item  is  protested, 
it  must  be  taken  up  by  the  borrower  and  the  fees  paid  in 
addition ;  or  if  pajnnent  cannot  be  obtained  at  once,  it  is  car- 
ried in  a  suspense  account  for  later  adjustment. 

UNEARNED  DISCOUNT* 

When  the  discount  is  made,  the  interest  is  deducted  and 
credited  as  an  earning.  This,  of  course,  makes  the  period  in 
which  the  note  is  discounted  show  an  earning  that  may  lap 
over  into  another  period.  For  instance:  A  loan  of  $100  is 
made  March  1st,  due  July  1st.  The  dividend  figures  are 
made  up  on  April  1st.  To  consider  the  interest  for  the  full 
time  as  an  earning  for  the  period  ending  April  1st  is  to  de- 
ceive ourselves,  and  only  that  part  of  the  earnings  which 
properly  belong  in  the  period  should  be  reckoned  as  an 
earning.  Therefore  the  interest  for  March  only  is  properly 
part  of  the  earnings  for  the  period,  and  all  well-managed 
banks  endeavor  to  so  apportion  interest  earnings. 

Likewise,  loans  where  the  interest  is  paid  at  maturity 
must  have  the  earnings  for  the  time  thev  have  run  until  divi- 

<-j  •/ 

dend  time  entered  as  accrued  interest,  thereby  swelling  the 
earnings  of  the  bank  by  the  amount  due  but  unpaid.  These 
accruals  can  only  be  determined  by  taking  each  note  and 
apportioning  the  interest  over  the  term,  entering  under  each 
month  the  interest  that  is  earned  during  the  month,  so  that 
at  any  time  the  true  earning  power  may  be  known. 

Mr.  Howard  M.  Jefferson,  auditor  of  the  New  York 

*For  a  simple  method  of  figuring  interest  accrued  and  unearned  discount,  see 
appendix  "A"  (Note  to  Fifth  Edition). 


282 


THE    PRACTICAL   WORK   OF    A   BANK 


CO 


O 

w 


Q 

W 

5 


v 

| 

Is 

§1 

si 

o 
o 
o 

§1 

o 
i 

2s- 

o 

o  o 

O    ^i 

o  o 

o 

o  ^^ 

£ 

"   ^f 

^^ 

« 

c 

6 

o 

s 

o 

o 
o 

§1 

§1 

o 
o 
o 

0  8 

§i 

i 

10 

o 

C4 

s 

52 

35 

2 

32 

o  ^ 

e 

e 

e 

^ 

i 

li 

0 
0 
0 

§1 

o 

8 

"3 

§i 

4 

•* 

1 

°0 

0 

•0 

o  »o 

10 

«> 

* 

^s 

e 

,| 

N. 
(N 

CO 

0 

0 

cc 

-H 

<N 

CO 

* 

0       | 

^ 

>> 

| 

>> 

h 

a 

-. 

V 

ta 

p 

<• 

- 

>• 

v 

e3 

<-> 

•-9 

£ 

1? 

*» 

Q 

| 

•5 

-S 

1 

1 

*0 

^ 

>>       9 

0 

a 

i 

Tuesday. 

Wednesda 

Thursday 

_rt 

•c 

Saturday. 

c 

CO 

Monday.  . 

Tuesday  .  . 

Wednesda 
u-Reductior 

Da. 


LENDING  THE  BANK'S  MONEY 

INTEREST  ACCRUED 


288 


CR. 


Date 

Memoranda 

Amount 

Date 

Memoranda 

Amount 

June 

27 

Int.  Acc'd  Rec. 

$4 

44 

June 

30 

Cash 

$  13 

03 

" 

28 

13 

47 

July 

5 

" 

154 

^ 

" 

29 

ii       i         a 

17 

M 

" 

30 

a       a        n 

13 

19 

July 

1 

a       n        a 

28 

19 

4 

90 

83 

Total 

$167 

76 

Total 

$167 

7ti 

Note:  The  credit  entry  of  $13.03  should  be  $13.33.     Form  was  photographed 
as  Mr.  Jefferson  had  it— W.  H.  K.,  Jr. 


DR. 


INTEREST  ACCRUED  RECEIVABLE 


CR. 


Date 

Memoranda 

Amount 

Date 

Memoranda 

Amount 

June 

30 

Profit  and  Loss 

$48 

74 

June 

27 

Int.  Accrued 

$4. 

44 

a 

28 

n          it 

13. 

47 

"     29 

n          u 

17. 

64 

« 

:io 

II                      1C 

13. 

19 

Total 

$48 

74 

Total 

$48. 

74 

July 

1 

Int.  Accrued 

$28. 

19 

4 

90. 

83 

FORM    C 


284  THE   PRACTICAL  WORK  OF   A   BANK 

Federal  Reserve  Bank,  has  made  a  specialty  of  accrued  in- 
terest receivable  and  payable  and  in  the  text  book  on 
"Banking"  of  the  Alexander  Hamilton  Institute  course  says 
in  this  respect : 

"A  very  simple  method  of  accruing  interest  receivable 
day  by  day  on  loans  will  be  explained  in  detail.  Application 
of  this  principle  may  be  made  to  bonds  and  mortgages, 
stocks  and  bonds,  interest  payable  on  accounts  and  certifi- 
cates of  deposit. 

"A  columnarized  sheet  as  shown  in  Form  A  will  do  for 
the  daily  record.  Accounts  should  be  set  up  in  the  general 
ledger  as  shown  in  Forms  B  and  C.  The  accounts  shown  in 
Forms  D  and  E  will  already  be  on  the  ledger.  We  will 
carry  the  work  over  the  end  of  the  fiscal  period  to  show 
how  the  books  would  be  closed  and  will,  therefore,  begin 
our  record  on  Monday,  June  27,  and  run  to  Wednesday, 
July  6,  closing  the  books  on  June  30. 

"The  following  transactions  take  place:  June  27,  loans 
made,  $20,000  at  five  per  cent  and  $10,000  at  six  per  cent. 
These  loans  should  be  entered  as  per  Form  A.  At  the  end 
of  the  day,  which  is  equal  to  the  opening  of  the  day  follow- 
ing, 'interest  accrued'  is  charged  and  'interest  accrued  re- 
ceivable' is  credited  with  one  day's  interest  on  the  loans 
made  at  the  respective  rates. 

$20,000  at  5%  for  one  day $2.77 

10,000  at  6%  for  one  day 1.6? 


Total  (See  Forms  B  and  C) $4.44 

"If  the  loans  are  not  very  active,  the  same  sheet  may  be 
used  from  day  to  day.  If  very  active  it  will  be  better  to 
open  a  new  sheet  each  day  with  the  balances  outstanding  at 
the  various  rates  on  the  day  previous. 

"On  the  28th  two  new  loans  were  made,  $50,000  at  four 
per  cent,  and  $25,000  at  five  per  cent.  These  are  entered  in 
the  proper  columns  on  the  daily  sheet.  At  the  close  of  the 
day  'interest  accrued'  is  charged  and  'interest  accrued  re- 
ceivable' is  credited  with  one  day's  interest  on  the  total 
amount  of  locns  held  by  the  bank  at  the  various  rates  as 
follows : 

$50,000  at  4%  for  one  day $5.55 

45,000  at  5%  for  one  day 6.25 

10,000  at  6%  for  one  day 1.67 


Total  (See  Forms  B  and  C) $13.47 


LENDING    THE    BANK'S    MONEY  285 

"On  the  29th  three  loans  of  $10,000  each  are  made  at 
four,  five  and  six  per  cent,  respectively  and  entries  made  as 
per  the  figures.  The  accrued  accounts  receive  the  entries  on 

$60,000  at  4%  for  one  day $6.67 

55,000  at  5%  for  one  day 7.64 

20,000  at  6%  for  one  day 3.33 

Total  (See  Forms  B  and  C) $17.64 

"On  the  30th  two  loans  are  paid  with  interest,  $20,000 
at  five  per  cent.,  the  company  receiving  three  days'  interest 
amounting  to  $8.33,  and  $10,000  at  six  per  cent.,  the  com- 
pany receiving  three  days'  interest  amounting  to  $5.00. 
These  payments  are  entered  on  the  daily  sheet  in  red  and  de- 
ducted from  the  balance  of  the  previous  day.  The  $13.33 
received  as  interest  is  charged  to  'cash'  and  credited  to  'inter- 
est accrued'  as  per  Forms  B  and  D.  The  accrued  accounts 
receive  the  usual  charges  and  credits  for  the  interest  on  the 
balances  in  the  loans  at  the  different  rates : 

$60,000  at  4%  for  one  day $6.67 

35,000  at  5%  for  one  day 4.86 

10,000  at  6%  for  one  day 1.66 

Total  (See  Forms  B  and  C) $13.19 

"At  this  juncture  the  books  are  closed  for  the  six  months. 

'Interest  accrued  receivable'  is  closed  into  'profit  and  loss.' 

"On  July  1  two  new  loans  are  made,  $75,000  at  four  per 

cent,  and  $40,000  at  six  per  cent.     The  usual  entries  are 

made  in  the  accrued  accounts : 

$135,000  at  4%  for  one  day $15.00 

35,000  at  5%  for  one  day 4.86 

50,000  at  6%  for  one  day 8.33 


Total  (See  Forms  B  and  C) $28.19 

"The  second,  being  Saturday,  but  one  loan  is  made, 
$15,000  at  five  per  cent.  Sunday  and  Monday  being  holi- 
days it  will  be  necessary  to  accrue  for  three  days  instead 
of  one : 

$135,000  at  4%  for  three  days $45.00 

50,000  at  5%  for  three  days 20.83 

50,000  at  6%  for  three  days 25.00 

Total  (See  Forms  B  and  C) $90.8.'i 


286 


THE   PRACTICAL  WORK  OF   A   BANK 


DR. 


CASH 


CR. 


Date 

Memoranda 

Amount 

Date 

Memoranda 

Amount 

June 

30 

Interest  Accrued 

$  13 

33 

July 

5 

a             n 

154 

43 

FORM    D 


DR. 


PROFIT  AND  LOSS 


Date 

Memoranda 

Amount 

Date 

Memoranda 

Amount 

June 

30 

Interest  Acc'd 

Receivable 

$48 

74 

"On  the  fifth  all  loans  are  paid  with  interest  as  follows: 


$50,000  seven  days  at  4% 

25,000  seven  days  at  5% ' 24.31 

10,000  six  days  at  4% 6.66 

10,000  six  days  at  5% 8.33 

10,000  six  days  at  6% 10.00 

75,000  four  days  at  4% 33.33 

40,000  four  days  at  6% 26.66 

15,000  three  days  at  5% 6.25 


$235,000 


$154.43 


"The  interest  received,  $154.43,  is  charged  to  'cash'  and 
credited  to  'interest  accrued,'  closing  the  latter. 

"The  paid  loans  are  entered  in  red  on  the  daily  sheet  and 
deducted,  leaving  no  loans  on  which  to  accrue  interest  at  the 
close  of  the  fifth  day. 


LENDING    THE    BANK'S    MONEY  287 

"It  is  a  little  difficult  to  apply  this  system  to  deposits 
upon  which  interest  is  paid  on  average  daily  balances,  but 
even  this  may  be  accomplished  if  these  accounts  are  segre- 
gated from  the  non-interest  bearing.  It  may  be  applied  with 
no  trouble  at  all  to  certificates  of  deposit  and  other  special 
accounts." 

ACCOUNTS  RECEIVABLE  AS  COIXATERAJL 

There  is  a  class  of  collateral  loans  that  is  coming  to  be 
common  in  banking,  but  more  especially  in  mercantile  circles, 
based  upon  accounts  receivable.  Where  a  merchant  is  not  in 
the  best  of  credit,  and  has  no  better  security  to  offer,  and 
cannot  borrow  on  his  own  name  unsecured,  and  does  not 
take  notes  from  his  debtors,  he  may  pledge  his  accounts  re- 
ceivable, meaning  his  book  accounts.  Next  to  cash  these  are 
his  most  liquid  asset  and  his  best  security  (if  good)  and 
some  banks  will  loan  on  the  strength  of  these  accounts.  They 
are  usually  assigned  to  the  lending  bank,  and  notice  served 
on  the  debtors  that  the  accounts  have  been  pledged  and  that 
payment  must  be  made  to  the  bank  instead  of  the  merchant. 
At  times  the  accounts  are  merely  pledged  and  collections 
made  in  the  usual  way. 

There  are  "commercial  bankers"  who  make  a  business  of 
loaning  on,  or,  to  speak  more  correctly,  buying,  these  ac- 
counts. There  is  also  what  is  known  as  the  "factor,"  or  com- 
mission merchant,  who  not  only  sells  goods  for  customers 
and  mills  for  whom  he  acts  as  selling  agent,  but  also  finances 
manufacturing  operations.  It  is  done  largely  through  the 
medium  of  the  accounts  receivable.  A  simple  illustration 
will  show  how  these  operations  are  carried  on.  Let  us  sup- 
pose a  manufacturer  of  woolen  cloth  sells  a  bill  of  goods  to 
a  well-known  clothing  firm.  The  terms  of  the  sale  are  three 
months,  with  a  discount.  The  manufacturer  cannot  wait 
that  long  for  his  money,  being  short  of  capital  funds,  and 
has  no  banking  connection  that  will  loan  on  his  note  or  on 
his  accounts  receivable.  He,  therefore,  arranges  with  the 
factor  to  buy  this  account,  and  the  factor  will  do  so.  The 
latter  operates  a  very  finely  organized  credit  department 
that  keeps  in  touch  with  all  leading  merchants  the  country 
over  and  can  judge  the  credit  risk  with  considerable  accu- 
racy. The  factor  will  advance  the  manufacturer,  say,  eighty 


288 


THE   PRACTICAL  WORK  OF   A   BANK 


per  cent,  of  the  amount  of  the  bill,  and  charge  him  interest 
at  the  legal  rate  for  the  time  it  has  to  run.  If  the  twenty 
per  cent,  is  also  desired,  which  in  effect  is  a  guaranty  of 
payment  of  the  full  amount  of  the  bill,  the  factor  will  charge 
an  extra  percentage  for  the  risk  he  runs.  The  bill  is  as- 

Interest  Statement 
Rate       % 


In  Account  with  the 

Guaranty  Trust  Company  of  New  York 


Date 

Balance 

(Hundreds)" 

No. 
of 
Days 

Aggregates 

(Hundreds) 

Interest 

From 

To 

INTEREST  STATEMENT 


signed  to  the  factor  and  the  advance  made  in  cash.  Some 
manufacturers  and  merchants  do  this  as  a  steady  policy,  so 
much  so  that  their  bill-heads  are  printed:  "This  bill  assigned 
to  Blank  &  Company,  Factors,  and  all  payments  must  be 
made  direct  to  them." 

A  bank  making  advances  on  such  accounts  must  know 
that  they  are  bona  fide  debts,  and  that  the  debtors  are  good 
for  the  amount  of  the  bills.  Considerable  margin  is  allowed 


LENDING    THE    BANK'S    MONEY  239 

for  the  shrinkage  inevitable  in  all  such  matters  and  when 
made  with  a  reliable  firm,  and  ample  margin  allowed,  are  a 
good  security,  but  not  in  general  favor. 

INTEREST 

•) 

The  banking  custom,  sanctioned  by  law,  is  to  consider 
360  days  to  the  year,  thirty  days  to  the  month  and  charge 
discount  for  every  day  from  date  of  credit  to  date  of  ma- 
turity, excluding  the  former  and  including  the  latter. 

The  rate  of  interest  changes  frequently  on  "Street 
Loans."  Payment  of  interest  is  usually  made  monthly.  The 
interest  can  be  calculated  by  multiplying  the  rate  per  cent, 
by  the  number  of  the  days  it  stood  at  that  rate,  or  by  the 
use  of  interest  tables. 

Find  total  of  these  products,  add  four  decimal  places, 
then  divide  by  thirty-six.  The  answer  will  be  the  interest 
on  $100,000.00  in  dollars  and  cents.  Thus,  $100,000.00 
loaned  Oct.  1,  1910,  at  three  per  cent.,  changes  Oct.  4  to 
two  and  one-half,  Oct.  8  to  four  per  cent.,  and  Oct.  10  to 
three  and  one-half,  paid  Oct.  15,  1910: 


Oct.     1  to    4  at  3  per  cent..  3  days $9.00 

Oct.    4  to    8  at  2y2  per  cent.,  4  days 10.00 

Oct.    8  to  10  at  4  per  cent.,  2  days 8.00 

Oct.  10  to  15  at  3y2  per  cent.,  5  days 17.50 


$44.50 
36)44.5000(123.61 

This  rule  may  also  be  stated  as  follows:  Multiply  the  rate 
per  cent,  by  the  number  of  days  for  each  interest  interval,  add 
the  successive  products,  multiply  the  sum  of  the  products  by 
the  principal  and  divide  by  36,000.  The  answer  will  be  interest 
due  in  dollars  and  cents. 

Some  banks  keep  a  daily  skeleton  balance  ledger  of  the 
loans  at  the  rate  per  cent,  the  loans  are  made,  posting  the 
new  loans  and  payments  under  the  rate  per  cent.  This 


16 


Aso*°        Daily  Balances 

of 

with  Guaranty  Trust  Company  of  New  York. 

Interest  Account  foe  Month  ending                        191 

Dr. 

0. 

26 

27 
28 

29 
30 

I 

2 

3 

4 

5 
6 

7 
8 

9 

10 

ii 

12 

14 
15 

16 

17 
18 

»9 

20 

21 

22 

23 

24 
25 

lute 

at 

240 


INTEREST   STATEMENT   BASED    ON    DAILY    BALANCES 


LENDING    THE    BANK'S    MONEY  241 

enables  the  bank  to  tell  at  once  just  at  what  rates  all  the 
loans  stand.8 

In  discounting  interest-bearing  instruments,  it  is  the  cus- 
tom to  discount  the  interest  as  well  as  the  principal.  A  note 
of  $1,000  running  one  year  and  bearing  interest  at  six  per 
cent,  amounts  to  $1,060,  but  when  discounted  the  amount  of 
the  proceeds  would  be  $996.40  and  not  $1,000. 

It  is  a  good  custom  each  week  to  make  out  a  maturity 
sheet,  showing  a  list  of  notes  due  during  the  following  week 
for  which  a  part  renewal  may  be  asked.  Record  on  this 
sheet  makers  and  indorsers,  amount,  when  due,  total  due  on 
own  paper  and  receivables,  also  the  average  balance  for  the 
past  six  months.  This  enables  the  officers  to  look  the  matter 
up  before  the  request  for  renewal  is  made. 

Occasionally  the  officers  or  directors  want  to  know  the 
amount  of  unearned  interest,  that  is,  the  amount  that  would 
be  charged  to  profit  and  loss  if  every  note  was  rebated. 
First  find  the  average  rate  by  multiplying  each  rate  by  the 
total  discounted  at  that  rate,  add  the  results  together  and 
divide  by  the  total  amount  under  discount.  Then  find  the 
average  time  by  multiplying  total  of  each  day's  notes  by 
number  of  days  they  have  to  run;  add  the  results  of  these 
totals,  and  divide  by  total  amount  under  discount.  Having 
the  average  rate,  and  the  average  time,  you  can  easily  tell 
amount  of  unearned  interest. 

In  a  book  with  an  index,  having  spaces  ruled  off  on  each 
page,  keep  a  profit  and  loss  record  of  unpaid  matured  dis- 
counted paper.  Have  each  space  numbered.  In  these 
spaces  record  a  full  description  of  each  item  —  to  whom  it 
has  been  turned  over  for  collection,  if  any  part  payment  is 
made,  etc. 

The  items  themselves,  or  a  copy,  if  they  are  out  of  your 
possession,  should  be  placed  in  envelopes  and  these  envelopes 
marked  with  the  same  number  as  the  space  in  the  profit  and 
loss  record.  These  envelopes  should  be  filed  numerically  so 
the  paper  can  be  readily  located,  however  many  years  it  may 
be  old.  The  envelopes  save  the  items  from  wear  and  tear.4 

It  is  not  the  custom  for  banks  to  give  receipts  for  collat- 
eral, for  the  receipt  would  be  evidence  of  the  existence  of  the 


.  M.  Rosendale,  Assistant  Cashier  Market  &  Fulton  National  Bank,  New 
York,  before  Pittsburgh  Chapter,  A.  I.  B. 

fWm.  M.  Rosendale  in  The  Bankers  Magazine, 


242  THE   PRACTICAL  WORK  OF   A   BANK 

collateral  and  the  ownership  in  the  borrower,  and  might  lead 
to  hypothecation  and  other  irregularities.  And  where  sub- 
stitutions are  frequently  made,  as  is  the  case  in  stock  ex- 
change loans,  these  receipts  would  be  a  nuisance  and  are 
given  if  at  all  only  under  protest  and  are  most  generally 
refused. 

PAYMENT  OF  CALL  LOANS 

The  New  York  Stock  Exchange  has  no  set  rules  govern- 
ing loans.  The  payment  of  call  loans  may  be  demanded  up 
to  one  o'clock,  and  custom  requires  that  they  shall  be  paid 
by  two  o'clock.  The  law,  however,  gives  them  until  three 
o'clock.  The  time  up  to  which  renewals  may  be  made  on 
call  loans  is  one  o'clock.  The  renewal  rate  on  call  loans  is 
made  in  accordance  with  the  supply  and  demand  on  the  floor 
of  the  New  York  Stock  Exchange  any  time  before  one 
o'clock.  After  the  stock  exchange  rate  has  been  communi- 
cated to  the  various  offices  renewals  of  the  entire  list  are 
made  on  that  basis  between  lender  and  the  borrower  direct. 
The  rate  of  money  after  one  o'clock  frequently  differs  from 
the  renewal  rate. 

Receipts  for  the  return  of  the  collateral  are  taken  on  the 
cards.  All  letters,  memoranda,  etc.,  are  filed  in  the  enve- 
lopes. It  is  also  a  good  plan  when  stamping  the  note  "Paid" 
to  have  it  read  "Collateral  Returned."  If  there  is  anything 
in  a  loan  that  requires  attention  on  a  certain  date,  record  it 
under  the  proper  day  in  a  diary  or  better  by  card  system. 

LOANING  FOR  THE  BANK'S  CORRESPONDENTS 

When  the  country  banker  decides  that  his  New  York  ac- 
count is  not  earning  enough,  and  makes  up  his  mind  to  loan 
in  the  market  on  his  own  account,  he  will  so  notify  his  cor- 
respondent. When  rates  are  high  this  is  in  vogue  and  the 
country  banks  benefit;  when  rates  on  call  loans  are  low,  the 
funds  will  be  placed  back  on  interest,  usually  at  two  per 
cent.,  and  the  city  bank  loses.  These  loans  are  usually  made 
to  stock  exchange  firms,  and  are  payable  on  demand.  There 
is  what  is  called  the  participation  loan,  by  which  several 
small  banks,  not  being  willing,  or  being  prohibited  from 
loaning  an  amount  sufficiently  large  to  go  into  the  market 


LENDING    THE    BANK'S    MONEY  248 

(Wall  Street  loans  being  in  the  sum  of  $50,000  or  over,  as 
a  rule),  several  banks  may  combine,  and  through  the  city 
bank,  or  the  bank  acting  for  several,  make  a  participation 
loan,  each  bank  sharing  in  its  proportion. 

All  that  has  been  said  regarding  demand  loans  is  ap- 
plicable here,  the  principles  being  the  same.  In  the  National 
Park  Bank  the  following  method  is  pursued:  Upon  receipt 
of  a  request  from  a  correspondent  to  make  a  demand  loan, 
the  amount  is  charged  directly  against  the  account  of  that 
correspondent  through  the  cashier's  check  book,  when  the 
check  is  drawn  and  delivered  to  the  broker  to  whom  the  loan 
is  made.  Upon  payment  of  the  loan,  the  broker's  check  is 
credited  to  the  account  of  the  correspondent  through  the 
general  book  in  the  note  teller's  department.  The  color  of 
the  cashier's  check  delivered  to  the  brokers,  and  of  the  card 
showing  the  record  of  the  collateral  for  loans  made  for  cor- 
respondents is  yellow  ;  so  that  at  a  glance  the  auditor  and  his 
assistants  can  classify  the  loans  made  for  customers,  since 
the  checks  and  cards  used  in  loans  made  for  the  bank  are 
white.  This  method  of  keeping  the  records  of  loans  for  cor- 
respondents makes  it  possible  for  the  auditor  to  eliminate 
these  figures  from  the  general  proof  of  the  bank's  work.  The 
auditor  receives  from  the  loan  department  each  day  and 
enters  in  a  memorandum  book  the  total  amount  of  loans 
made  for  correspondents,  as  well  as  the  total  amount  of  loans 
paid  on  account  of  correspondents;  the  difference  represents 
the  amount  of  loans  outstanding.  This  method  combines 
simplicity  with  safety.3 

WAREHOUSE  LOANS 

A  warehouse  or  commodity  loan  is  one  based  upon  com- 
modities held  by  a  warehouseman  and  evidenced  by  ware- 
house certificates.  It  is  essentially  the  purchase  of  the  goods 
for  the  account  of  the  borrower  and  the  loan  is  as  good  as  the 
goods  and  no  better.  The  essentials  are  the  same  as  in  all 
collateral  loans  and  all  that  has  been  said  under  collateral 
loans  here  applies.  There  is,  however,  the  danger  of  deteri- 
oration in  merchandise  that  does  not  obtain  in  the  case  of 


.  C.  Macavoy  of  the  National  Park  Bank,  New  York,  before  New  York 
Chanter. 


244  THE   PRACTICAL   WORK   OF   A   BANK 


Guaranty  Trust  Company  of  New  York 

140  BROADWAY 

NEW  YORK, 


For  purpose  of  audit  and  verification  we  beg  to  advise  you  that  we  are 

loaning  you  at  the  close  of  business  to-day,. the  sum  of  $ 

with  securities  mentioned  below  as  collateral. 

If  the  amount  and  collateral  is  correct,  kindly  sign  acknowledgment  at 
the  foot  of  this  statement  and  return  at  once  in  enclosed  envelope. 

Yours  very  truly, 

RALPH  DAWSON, 

Auditor, 


The  above  statement  is  correct 


VERIFICATION    OF    COLLATERAL    LOAN SENT    TO    BORROWER    FOR    SIGNATURE 

security  loans,  the  physical  qualities  being  no  element  in  the 
latter  and  the  vital  factor  in  the  former. 

In  the  first  place,  we  must  have  a  bona  fide  warehouse 
receipt,  properly  executed,  as  evidence  that  the  property  is 
in  the  custody  of  the  warehouseman ;  second,  the  goods  must 
be  what  they  purport  to  be,  and,  thirdly,  they  must  be  in 
good  condition.  As  evidence  of  the  former,  the  bank  mak- 
ing the  loan  must  know  the  signatures  and  forms  of  the 
warehouse  as  it  would  know  the  signatures  on  a  check.  To 
verify  the  condition  of  the  goods  only  physical  inspection 
can  assure  quality  and  quantity.  A  receipt  acknowledging 


LENDING    THE    BANK'S    MONEY  245 

so  many  barrels  "said  to  contain"  a  certain  article,  might 
contain  something  else. 

Banks  should  loan,  if  at  all,  only  on  staple  products,  in 
steady  demand,  not  subject  to  fashion,  and  with  a  fair  mar- 
gin for  shrinkage. 

It  is  conceded  that  the  risk  in  warehouse  loans  is  consid- 
erable on  account  of  the  physical  difficulties;  but  inasmuch 
as  it  is  the  business  of  the  bank  to  assist  commerce  and  in- 
dustry, it  is  needful  and  proper  that  it  assume  legitimate 
risks  for  the  good  of  the  common  weal;  and  the  bank  that 
will  not  assume  the  risks  of  trade  is  not  fulfilling  its  right- 
ful place  in  the  economic  scheme.  If  every  bank  were  to 
require  security  in  the  form  of  lawful  money  (and  banks 
have  made  loans  on  actual  money,  the  owner  requiring  the 
identical  bills  in  a  few  days,  and  chose  to  obtain  a  loan  rath- 
er than  take  the  chance  and  trouble  of  getting  others)  they 
would  be  asking  impossible  security;  while  the  woman  who 
wanted  a  loan  on  her  fire  insurance  policy  was  offering  secu- 
rity of  the  other  extreme.  Somewhere  in  between  the  two 
lies  the  middle  ground  of  safety  and  service. 

Granting  that  the  borrower  meets  the  conditions  named 
in  the  chapter  on  "Essentials  in  Granting  Credit,"  and  the 
receipt  is  bona  fide,  our  chief  concern  will  be  with  the  class 
of  goods. 

As  above  stated,  they  must  be  staple.  To  loan  on  orna- 
ments for  my  lady's  dress  would  not  be  very  good  banking; 
but  to  loan  on  silk  to  make  it  for  her  would.  The  latter 
security  would  be  stable,  both  in  price  and  in  demand.  Of 
this  class  are  loans  on  wheat,  cotton  and  other  cereals. 

But  the  wheat  should  be  of  the  quality  claimed,  and 
this  can  be  ascertained  by  requiring  the  inspection  certifi- 
cate issued  at  the  ports  on  the  Great  Lakes,  or  in  New 
York,  and  which  are  recognized  everywhere  as  authentic 
certification  of  the  grade.  And  wheat  so  graded  will  hold 
its  grade  the  world  over.  Wheat  flour  is  good  security,  but 
apt  to  spoil  under  unfavorable  conditions.  Corn  will  "heat" 
if  improperly  kept.  Only  a  recent  inspection  certificate  will 
safeguard  these  tendencies.  Cotton  is  ordinarily  prime  secu- 
rity. Its  value  may  be  ascertained  at  any  time;  but  the 
cotton  must  be  cotton  and  not  the  fag  ends  of  the  picking 
— linters. 

The  prices  of  staple  commodities  may  be  ascertained 


246  THE   PRACTICAL   WORK  OF   A   BANK 

from  public  quotations  in  the  trade  papers,  which  are  gen- 
erally reliable,  but  at  times  should  be  checked  up  independ- 
ently, to  be  certain  that  prices  are  not  "washed"  for  an  oc- 
casion. The  goods,  of  course,  must  be  insured,  and  certifi- 
cates of  this  fact  required.  Having  an  authentic  document, 
goods  of  the  weight  and  quality  claimed,  at  an  ascertained 
price  and  insured,  and  a  margin  for  shrinkage,  both  in  price 
and  quantity,  and  a  responsible  borrower,  the  loan  is  as  safe 
as  the  needs  of  men  are  constant. 

BILLS  or  LADING 

The  bill  of  lading  is  an  instrument  acknowledging  the 
receipt  of  certain  goods  to  be  transported  under  stipulated 
conditions.  When  issued  in  certain  form  it  contracts  to  de- 
liver the  goods  to  the  consignee  only,  or  on  his  order,  and 
the  delivery  of  the  bill  of  lading  is  necessary  to  obtain  the 
goods,  and  possession  of  the  bill  is  warrant  to  the  carrier  to 
deliver.  In  other  forms  the  bill  is  not  required  as  a  requi- 
site to  delivery. 

It  is,  of  course,  as  history  has  demonstrated,  an  easy 
matter  for  a  railroad  agent  to  issue  a  bill  which  represents 
nothing  but  a  fraud.  Such  blanks  are  easily  obtained,  and 
easily  issued,  and  gross  frauds  and  severe  losses  have  been 
visited  upon  American  banks  through  bogus  bills  of  lading. 
The  tendency  of  the  times  is  to  require  the  transportation 
companies  to  use  due  care  in  the  selection  and  authorization 
of  agents  and  to  hold  them  responsible  for  fraudulent  bills. 
The  cotton  frauds  of  a  few  years  ago  in  the  Knight,  Yancy 
matter  in  the  South  arose  through  bogus  bills  of  lading. 
Fraudulent  bills  were  issued,  and  on  the  strength  thereof, 
drafts  were  drawn,  sold  and  sent  to  Europe  for  payment, 
only  to  find  that  the  cotton  supposed  to  follow  did  not  exist, 
and  the  bill  of  lading  a  forgery.  The  case  is  still  in  the 
courts,  but  thus  far  it  has  been  held  that  the  one  accepting 
and  paying  the  drafts  must  lose,  as  the  drafts  were  accepted 
on  the  credit  of  the  drawer  and  not  on  the  cotton  fictitiously 
shipped. 

The  dangers  arising  from  bills  of  lading  shipments  are 
indicated  by  a  set  of  instructions  sent  out  by  the  American 
Bankers  Association  a  few  years  ago.  Summarized  they 
are  as  follows:  (a)  Except  in  a  few  States,  a  bill  of  lading 
does  not  guarantee  delivery  of  the  article  listed  in  the  bill. 


LENDING    THE    BANK'S    MONEY  247 

The  road  is  responsible  only  for  the  goods  actually  received, 
even  though  the  agent  signed  for  more,  (b)  The  bill  of 
lading  does  not  guarantee  the  quality  of  the  goods.  It 
gives  a  list  merely  of  the  goods  as  furnished  by  the  shipper. 
So  many  boxes  "said  to  contain" — of  a  certain  weight,  (c) 
It  may  be  issued  in  fraud  and,  therefore,  not  binding  upon 
the  company,  (d)  Bills  may  be  issued  in  sets,  and  dupli- 
cates outstanding  not  marked  arid  delivery  already  made  on 
the  original,  (e)  Part  of  the  goods  may  have  been  deliv- 
ered, and  not  endorsed  on  the  bill,  (f)  The  goods  may 
have  deteriorated. 

There  is  now  issued  by  all  leading  railroads  the  uniform 
bill  of  lading,  which  has  standardized  the  form,  so  that  it  is 
easily  recognized.  The  "order"  bill  of  lading  makes  indorse- 
ment necessary  in  order  to  secure  the  goods.  Thus,  a  bill 
might  consign  goods  to  order  of  "William  Williams"  and 
he  must  indorse  the  bill  to  obtain  delivery,  and  the  com- 
pany will  not  deliver  the  goods  without  the  bill.  The  other 
form  is  the  "direct"  bill,  which  contemplates  delivery  with- 
out the  bill  and  goods  consigned  on  such  a  bill  to  "William 
Williams"  will  be  delivered  without  the  bill  to  anyone  who 
represents  him. 

Bills  issued  on  grain  shipments  on  the  Great  Lakes  are 
in  sets,  and  possession  of  any  one  of  the  set  is  sufficient  to 
warrant  delivery,  and  in  such  cases  the  entire  set  must  be 
delivered  as  a  requisite  to  a  loan. 

Mr.  Thomas  B,  Nichols,  assistant  cashier  of  the  Produce 
Exchange  Bank  of  New  York,  which  deals  largely  in  such 
loans,  and  from  whom  many  of  the  foregoing  suggestions 
have  been  obtained,  suggests  as  a  safeguard  against 
forged  bills  that  the  arrival  notice  be  required.  This  is  sent 
to  the  consignee  when  the  goods  arrive,  and  by  checking  the 
name,  goods,  date  and  car  number,  the  authenticity  may  be 
established.  The  cotton  frauds  mentioned  above  have  re- 
sulted in  a  validation  bureau,  the  cotton  bills  being  certified 
to  as  genuine  by  the  railroad  issuing  the  same,  and  copy  for- 
warded to  the  validation  bureau  in  New  York  which  com- 
pares the  bills  and  attaches  its  certificate  that  the  bill  is  gen- 
uine. Stale  bills — bills  that  are  old — should  be  investigated 
very  carefully.  Goods  may  have  been  sidetracked,  spoiled 
damaged  or  destroyed,  and  an  old  bill  is  a  red  flag  of  danger. 
Elevator  receipts  are  in  the  nature  of  warehouse  receipts, 
these  being  for  grain  held  in  storage  and  in  process  of  trans- 


248  THE    PRACTICAL   WORK   OF   A   BANK 

fer  to  another  carrier.  A  loan  on  goods  in  transit  is  prac- 
tically the  same  as  on  goods  in  storage.  Large  amounts  are 
constantly  outstanding  secured  by  grain  en  route  from  the 
West  to  New  York.  The  bills  of  lading  and  draft  traveling 
faster  than  the  goods,  are,  nevertheless,  pledged,  and  ad- 
vances made,  the  security  attaching  wherever  the  goods 
may  be. 

A  very  excellent  paper  on  "The  Discount  Department"  has  been  written  by 
Herbert  E.  Stone  of  the  Second  National  Bank,  Boston,  from  which  much 
information  may  be  gathered  and  to  whom  acknowledgement  is  here  made  for 
suggestive  thoughts  in  this  chapter. 

Addendum  to  fifth  edition: 

TIMING  NOTES 

In  timing  notes  the  following  rules  will  be  helpful: 
If  the  note  is  made  payable  a  certain  number  of  months 
after  date,  it  is  due  on  the  same  date  in  the  month  indicated. 
Thus  a  note  dated  March  5th,  1919,  for  three  months  is  due 
June  5th.  If  it  is  made  payable  a  certain  number  of  days 
after  date,  it  is  due  that  many  days  from  date.  For  instance, 
a  note  for  ninety  days,  dated  March  5th,  1919,  is  due  June 
3d.  If  the  note  is  payable  on  a  certain  date,  figure  the  time 
in  days  from  the  date  to  maturity.  Thus  a  note  dated 
March  5th,  payable  April  15th,  carries  41  days'  interest.  If 
dated  March  1st,  with  interest,  the  interest  should  be  figured 
for  45  days  and  added  to  the  face,  and  the  whole  amount  dis- 
counted. Exclude  the  date  of  date  and  include  day  of  pay- 
ment. If  the  note  is  discounted  after  its  date  and  carries 
interest,  figure  the  interest  for  the  full  time  from  date  and 
discount  it  for  the  full  amount  with  interest  as  of  the  date 
the  credit  is  made.  If  the  note  carries  no  interest,  time  it 
from  its  date  and  discount  it  as  of  the  day  the  credit  is  made. 
If  the  due  date  falls  on  Saturday  or  Sunday,  it  is,  as  a 
rule,  due  on  Monday.  If  on  a  holiday,  on  the  next  day,  un- 
less that  day  be  Saturday  or  Sunday,  when  it  would  be  due 
on  Monday;  if  Monday  is  a  holiday,  then  it  is  due  on 
Tuesday.  For  timing  notes,  calendars  are  prepared  giv- 
ing numbers  to  the  days  of  the  year,  and  these  are  a  great 
help.-  January  2d  would  be  day  number  2,  and  a  note  due 
in  90  days  would  be  due  on  the  92d  day.  A  note  for  three 
months  discounted  on  the  76th  day  and  due  on  the  166th  day 
(Saturday)  would  be  due  on  the  168th  day,  and  carry  inter- 
est for  92  davs. 


CHAPTER  X. 
THE  BANK  AS  AN  ACCOUNTING  MACHINE 

The  purpose  of  accounting,  whether  financial  or  mer- 
cantile is  (1)  to  show  a  chronological  record  of  the  trans- 
actions which  occur  in  a  concern  that  affect  the  increase  or 
decrease  of  values;  (2)  to  determine  the  financial  position 
at  any  given  time — the  possession  of  and  liability  for  values ; 
and  (3)  to  determine  the  profit  or  the  loss  for  the  period. 

The  accounting  records  if  properly  kept  will  show  (a) 
what  the  concern  owns  on  the  one  hand,  and  (b)  what  it 
owes  on  the  other.  They  will  show  from  whom  value  was  re- 
ceived and  to  whom  value  is  due.  And  that  accounting  sys- 
tem is  wrong  in  principle  and  technique  that  does  not  accu- 
rately record  these  facts  and  bring  them  to  a  focal  point  at 
stated  times,  omitting  nothing  that  properly  belongs  in  these 
records. 

PRESENTATION  OF  ACCOUNTING  FACTS 

It  is  a  principle  of  accounting  that  the  financial  condition 
of  an  individual,  firm  or  corporation  can  best  be  understood 
by  a  simple  statement  conveying  a  single  idea,  which  ex- 
presses much  in  that  idea.  Thus,  we  may  state  that  a  man  is 
worth  a  million  dollars.  This  conveys  a  single  idea  of  his 
aggregate  wealth.  We  may  then  amplify  the  idea,  divide 
and  sub-divide  the  constituent  parts  into  as  many  as  may  be 
necessary  to  designate  precisely  of  what  the  original  state- 
ment is  composed.  We,  therefore,  proceed  to  classify  his 
wealth  into  two  forms,  real  and  personal,  by  saying  that  he 
has  half  a  million  in  real  estate  and  half  a  million  in  stocks 
and  bonds.  We  then  classify  the  stocks  and  bonds  and  real 
estate  into  sub-divisions,  so  that  in  the  process  we  have 
analyzed  the  elements  that  constitute  his  aggregate  wealth. 
We  may  present  this  idea  as  follows: 

r  Factory  properties,  $100,000  (Details) 

J   Tenements,  200,000  (Details) 

$500,000        [^  Apartments,  200,000  (Details) 


Totai 

wealth, 

$1,000,000 


Real  estate, 
Stocks  and 

bonds, 
$500,000 


Railroad  stocks,  $100,000  (Details) 

Industrial  stocks,  100,000  (Details) 

/  Municipal,  $100,000  (Details) 

Bonds  1  Rails,  100,000  (Details) 

'  Public  Utility,  100,000  (Details) 

249 


250  THE   PRACTICAL   WORK   OF   A   BANK 

Upon  this  idea  all  bookkeeping  rests.  There  must  be 
the  recording  of  details,  the  aggregation  of  these  details,  first 
in  one  record  which  assembles  and  classifies  the  original 
transactions,  from  which  they  are  carried  to  controlling  ac- 
counts, and  these  into  a  statement  or  balance  sheet  which 
summarizes  the  whole  process  for  ready  reference.  We  have, 
therefore,  a  record  of  the  transactions  and  the  result  of  the 
transactions.  And  the  bookkeeping  system  that  does  not  do 
this  is  weak  at  its  basic  point. 

THE  ACCOUNTS  OF  THE  BANK 

The  accounts  of  a  bank  differ  somewhat  from  the  ac- 
counts in  a  mercantile  house  in  that  the  records  of  a  bank 
all  have  to  do  in  the  main  with  cash.  There  is  no  merchan- 
dise to  handle  or  account  for;  no  "accounts  receivable,"  for 
nothing  is  sold;  no  returned  sales  or  inventories.  Bank 
bookkeeping  is  an  exact  science. 

And  yet  between  mercantile  and  financial  accounting 
there  is  some  agreement.  We  have  many  accounts  payable 
—not  for  merchandise  bought,  but  for  money  deposited.  We 
have  no  cash  discounts ;  but  we  do  have  exchange,  which  cor- 
responds. And  if  we  take  no  inventory  of  stock,  wre  do 
verify  the  bonds  and  commercial  paper.  We  render  state- 
ments of  reciprocal  accounts  and  have  the  "account  stated" 
of  the  mercantile  world.  We  buy  cash  for  credit  and  pay 
credit  in  cash.  The  bank  has  a  single  unit — the  dollar;  the 
merchant  the  yard  or  the  pound  as  measured  into  the  dollar. 

Bank  accounts  may  be  divided  into  three  classes: 
(a)  The  accounts  with  persons  and  corporations;  (b)  the 
accounts  with  property,  real  or  personal,  but  mostly  per- 
sonal; (c)  the  nominal  accounts.  To  these  might  be  added 
the  general  or  controlling  accounts,  from  which  is  made  up 
the  statement  of  condition  or  balance  sheet. 

The  accounts  with  individuals — depositors,  and  with 
banks,  which  are  in  a  sense  depositors — measure  the  indebt- 
edness of  the  bank  for  money  deposited.  The  accounts  with 
property  record  the  investments,  collections,  transit  items, 
etc.  (property  of  the  bank  in  process  of  collection,  or  prop- 
erty of  the  depositor  to  become  property  of  the  bank) ,  and 
other  property  of  the  bank;  while  the  nominal  accounts 
record  such  items  as  expenses,  interest,  profit  and  loss,  etc., 


BANK    ACCOUNTING 

ACCOUNTS  OPENED 
DATE. 


251 


NAME 

ADDRESS 

AMOUNT 

BUSINESS 

ACCOUNTS  CLOSED 
DATE 


NAME 

ADDRESS 

Date 
Opened 

BALANCE 

AVERAOE 
BALANCE 

BUSINESS 

RECORD  OF   ACCOUNTS   OPENED   AND    CLOSED   FOR   GUIDANCE    OF  OFFICERS 

and  assemble  or  hold  in  abeyance  the  amounts  for  a  time 
which  are  periodically  closed  out  into  the  controlling  ac- 
counts. Of  course,  all  accounts  are  representative  of  cash 
in  some  form,  for  the  bank  handles  nothing  else,  and  the 
records  all  have  to  do  with  the  increase  or  decrease  of  cash 
values  near  or  remote,  and  the  elements  which  affect  these 
values. 

BANKS  AGREE  IN  ESSENTIALS 

Essentially  the  same  work  must  be  done  in  every  bank, 
whether  it  be  large  or  small.  The  difference  lies,  not  in  the 
way  it  is  done  particularly,  but  who  does  it.  In  a  large  city 
bank  the  receiving  teller  may  simply  prove  the  cash  as  it 


252  THE    PRACTICAL  WORK  OF   A   BANK 

comes  in  over  the  counter,  leaving  the  verification  of  the 
checks,  their  endorsements  and  the  proof  of  the  ticket  to  his 
assistant  or  clerks  in  the  "hlock  system  proof"  (which  see), 
while  the  teller  in  a  small  bank  will  do  it  all  himself. 

Likewise  the  collection  clerk.  He  may  have  charge  of 
nothing  but  the  collections  of  the  bank,  while  this  may  be 
but  part  of  the  many  duties  of  the  general  bookkeeper 
of  the  country  bank.  As  banks  grow  in  size,  the  work 
must  be  divided  and  sub-divided  into  as  many  parts  as  need- 
ed in  order  to  make  a  finely  organized  piece  of  machinery, 
but  the  seemingly  complex  machine  with  hundreds  of  men 
does  no  different  work  than  the  more  simple  machine  that 
runs  with  three.  And  when  in  this  work  we  speak  of  turning 
an  item  over  to  a  department,  we  mean  that  it  goes  through 
a  certain  process  as  well  as  through  a  distinct  department  of 
the  bank's  work. 

It  is  impossible  to  describe  the  bookkeeping  of  the  aver- 
age bank,  for  the  "average  bank"  does  not  exist;  we  must 
either  take  a  large  city  bank;  a  bank  in  a  moderately  large 
city  or  a  country  bank;  but  wherever  the  bank  exists,  or 
whatever  the  size,  certain  fundamentals  of  the  bookkeeping 
must  be  observed  in  order  to  keep  the  records  in  proper 
shape.  These  records  expand  with  the  changing  needs  of  the 
business ;  but  in  their  essentials  they  all  agree.  If  we  under- 
stand a  large  bank  we  shall  easily  understand  a  small  one, 
since  those  departments  of  a  large  bank  which  are  necessary 
to  the  conduct  of  the  small  one  are  condensed  or  combined 
with  other  work. 

Thus  the  credit  work  may  be  finely  organized  into  a  dis- 
tinct department,  and  have  elaborate  information  regarding 
borrowers  at  hand,  and  officers  who  specialize  in  different 
lines  of  business;  but  in  a  country  bank  the  cashier  must 
have,  somewhere  in  his  head,  the  same  information  if  he 
would  extend  credit  wisely.  If  a  hardware  dealer  applies  to 
a  certain  Chicago  bank  for  a  loan,  he  will  be  referred  to  the 
vice-president  who  knows  the  hardware  line  and  follows  it 
closely;  but  if  he  makes  application  to  the  little  bank  the 
cashier  must  know  practically  the  same  things  about  the 
hardware  business  if  he  would  act  with  discretion.  It  is  the 
difference  between  the  general  practitioner  and  the  specialist, 


BANK    ACCOUNTING  258 

FUNDAMENTALS  ALIKE  IN  ALL  BANKS 

The  fundamentals  of  practical  banking  are  alike  in  all 
banks,  the  difference  being  in  the  methods  and  machinery 
by  which  the  fundamentals  are  put  into  execution.  Thus, 
there  is  the  department  of  receiving  and  paying  money,  mak- 
ing loans,  keeping  books,  rendering  statements,  and  direct- 
ing the  policies  of  the  institution.  The  work  may  be  highly 
departmentized,  or  done  by  a  force  of  three  or  four  men; 
but  the  same  work  must  be  done  in  its  essence.  While  no 
two  banks  are  alike  in  their  details,  the  work  as  a  whole  fol- 
lows lines  more  or  less  standardized. 

If  the  student  understands  the  nature  and  intent  of  the 
work  in  mind,  the  tools  with  which  to  accomplish  the  results 
will  readily  be  found,  and  too  much  minutia  leads  to  confu- 
sion. Moreover,  to  describe  books  of  record  is  not  as  inter- 
esting as  to  see  them,  for  that  is  the  purpose  of  illustrations ; 
and  to  understand  them  one  must  see  and  not  simply  read 
about  them.  In  other  works  will  be  found  many  of  the 
present-day  systems  which  are  old  and  tried  in  their  funda- 
mentals, as  well  as  in  their  machinery,  and  to  attempt  here  to 
describe  the  different  books  of  record  in  minute  detail  would 
be  to  repeat  what  other  authors  have  said,  which  is  far  from 
the  present  purpose.  Therefore,  we  will  confine  ourselves 
to  broader  views,  and  refer  to  other  works  as  occasion 
warrants. 

CORPORATE  RECORDS 

The  records  of  a  bank  may  be  divided  into:  (a)  The 
corporate  records  and  (b)  the  financial  records.  The  cor- 
porate records  consist  of  (1)  the  minute  book;  (2)  the  stock 
ledger;  (3)  the  stock  certificate  book;  and  (4)  the  stock 
transfer  book.  All  other  records  are  financial  and  not  cor- 
porate. 

The  minute  book  should  contain  a  complete  chronological 
record  of  the  corporate  affairs  of  the  bank.  The  election  of 
officers,  their  terms  and  compensation,  amendments  to  by- 
laws, issue  of  capital,  declaration  of  dividends,  ratification 
of  loans,  and  all  matters  which  come  before  the  board  of 
directors,  are  recorded  in  the  minute  book. 

The  record  is  best  kept  in  typewriting,  and  the  bound 
book  is  recommended  as  the  safer  way,  inasmuch  as  the  cor- 


254  THE   PRACTICAL  WORK  OF   A   BANK 

porate  history  and  the  formal  procedings  of  the  directors 
are  of  utmost  importance  and  should  not  be  open  to  the 
frauds  and  abstractions  possible  in  the  loose  leaf.  The  book 
typewriter  is,  therefore,  a  helpful  adjunct  to  this  end. 

The  record  should  begin  with  the  place  and  date,  the 
fact  that  the  meeting  has  been  duly  called  and  who  presides. 
Then  follows  the  names  of  those  present,  in  order  to  show 
a  quorum,  and  to  fix  responsibility  for  the  acts  there  done. 
The  minutes  of  the  last  meeting  are  read  and  approved,  and 
routine  business  transacted,  following  the  prescribed  order 
laid  down  in  the  by-laws.  This  usually  takes  the  form  of 
reports  and  resolutions.  The  former  are  incorporated  in  the 
record  in  full  or  referred  to  as  "on  file,"  while  the  latter 
are  transcribed  in  full,  giving  the  name  of  the  one  who  of- 
fers, the  one  who  seconds,  and  the  adoption  or  rejection  of 
the  resolution.  Some  matters  require  roll  call  and  others  a 
mere  "aye  and  nay"  vote.  The  minutes  are  duly  attested  by 
the  secretary  or  cashier,  and  become  the  official  history  of 
the  bank. 

They  should  be  carefully  indexed  as  to  names  and  sub- 
jects, every  proper  name  being  indexed  and  every  subject 
and  resolution  indexed  and  cross-indexed  if  necessary  to 
make  ready  reference  possible. 

Stockholders'  meetings  are  recorded  in  the  same  manner, 
the  number  of  shares  held  by  each  stockholder  present  in 
person  or  by  proxy  being  also  stated. 

The  minute  book  should  contain  a  history  of  the  bank  as 
it  is  made  in  the  board  meetings.  It  should  fully  set  forth 
the  proceedings,  and  completely  describe  the  action  taken. 
Some  banks  record  the  vote  on  every  question  submitted, 
even  to  calling  the  roll  on  every  loan;  but  this  would  seem 
needless  except  in  those  cases  where  the  law  requires  roll 
call,  or  in  matters  where  dispute  has  arisen,  when  the  vote 
should  be  fully  recorded.  In  routine  matters,  details  of  the 
vote  are  not  essential. 

Record  should  also  be  kept  of  every  director,  when  elect- 
ed, when  resigned,  when  deceased,  etc.,  for  biographical  and 
historical  purposes.  In  elections,  the  law  must  be  closely 
followed,  both  before  and  during  the  meeting,  so  that  the 
election  may  be  regular. 

One  of  the  functions  of  the  board  is  to  pass  on  loans,  and 
where  the  volume  is  large,  to  cumber  the  records  with  offer- 


BANK    ACCOUNTING  255 

ings  would  confuse  the  other  records,  and  so  an  offering 
book  may  be  used  to  list  the  offerings,  and  the  action  of  the 
board  on  the  various  items  indicated  by  proper  entry,  and 
certified  to  by  the  attestation  of  the  cashier  or  other  officer, 
and  signed  by  the  discount  committee.  The  idea  in  mind  is 
to  fasten  the  responsibility  for  the  loan  beyond  per- 
adventure. 

Reports  of  examinations  by  directors,  public  accountants 
and  State  and  Government  authorities  should  also  be  en- 
tered in  the  minutes. 

STOCK  CERTIFICATE  BOOK 

The  stock  certificate  book  contains  the  certificates  of 
stock  which  are  evidence  of  the  ownership  of  shares.  This 
is  similar  to  a  check  book  in  that  it  has  a  stub  giving  the 
name  of  the  stockholder,  date,  number  of  certificate,  number 
of  shares  and  sometimes  from  whom  the  certificate  was  re- 
ceived for  transfer  after  its  original  issue.  Provision  is  also 
made  for  a  receipt  on  the  bottom  of  the  stub  for  the  ac- 
knowledgment of  the  receipt  of  the  certificate. 

The  stock  book  records  the  ownership  of  the  stock  in  de- 
tail, giving  the  name  of  each  owner.  The  New  York  law  re- 
quires that  a  stock  book  be  kept,  setting  forth  in  alphabeti- 
cal arrangement  the  names  of  stockholders,  the  address  of 
each,  number  of  shares  owned,  when  acquired,  and  amounts 
paid  thereon. 

Thus,  if  John  Jones  bought  ten  shares  of  the  bank's 
stock  on  March  1,  1915,  represented  by  certificate  No.  210, 
and  sold  five  shares  to  William  Smith  on  April  1st,  repre- 
sented by  certificate  No.  220,  Jones  receiving  new  certificate 
for  five  shares,  the  account  would  look  like  this: 

JOHN  JONES 

Ctf.            Ctf.  Amt.       To  whom 

Date                   issued      cancelled     Dr.          Cr.  Bal.         paid             issued 

Mch.  1,  1915             210                                               10  10             full 

Apr.  1,  1915                             210            10  Wm.  Smith  (5) 

Apr.  1,  1915             221                                                 5  5             full 

Account  would  then  be  opened  with  William  Smith  as 
was  done  for  Jones.  The  total  of  this  book  as  representing 
shares  outstanding  must  equal  "Capital  Stock"  account  in 
the  general  ledger,  which  stands  at  the  amount  of  authorized 
capital  and  is  a  credit  balance. 

17 


S00  THE    PRACTICAL  WORK   OF   A   BANK 

In  banks  where  the  stock  is  active  a  stock  transfer  jour- 
nal is  sometimes  used,  which  is  a  chronological  record  of 
changes  in  stock  ownership,  giving  on  one  side  the  date, 
number  of  the  transfer,  number  of  certificate,  and  from 
whom  received  and  to  whom  the  new  certificate  is  issued.  On 
the  right-hand  page  is  the  same  information  as  to  the  new 
certificate  or  certificates;  for  one  certificate  may  be  split  up 
into  several,  and  several  might  be  combined  into  one.  The 
journal  merely  records  the  transactions  day  by  day  as  a 
guide  for  posting  in  the  stock  ledger. 

STOCK  SUBSCRIPTIONS 

Subscriptions  to  capital  stock  are  generally  paid  for  in 
installments  (in  a  new  bank)  and  receipts  issued  for  the 
same.  When  the  final  payment  is  made  the  stock  certificate 
is  issued.  The  details  are  noted  on  the  stub  for  record  pur- 
poses and  all  certificates  are  numbered.  Each  must  be  ac- 
counted for,  either  as  outstanding,  or  as  having  been  issued 
and  cancelled,  or  destroyed  because  of  errors.  Cancelled 
certificates  are  usually  attached  to  the  stubs. 

It  is  as  important  that  there  shall  be  a  record  of  trans- 
fers as  there  shall  be  record  of  issues.  When  transfers  are 
made,  the  old  certificate  should  always  be  cancelled  and  new 
ones  issued  for  the  new  allotments,  so  that  each  certificate 
will  represent  a  certain  number  of  bona  fide  shares  out- 
standing, with  a  clear-cut  record  of  their  issue.  Old  certifi- 
cates are  cancelled  by  stamping,  or  otherwise  indicating 
their  cancellation,  or  by  slightly  mutilating  the  signatures. 
A  rubber  stamp  "cancelled"  is  quite  sufficient. 

TRANSFER  OF  STOCK 

Authority  to  transfer  stock  may  be  made  on  the  back  of 
the  certificate  in  places  provided  for  such  transfers,  or  by  a 
separate  instrument.  Some  banks  have  a  transfer  book  for 
this  purpose,  but  this  prevents  the  transfer  being  recorded 
unless  the  parties  are  present,  which  does  not  always  follow. 
Care  should,  of  course,  be  taken  to  ascertain  that  the  trans- 
fers are  regular  and  forgery  does  not  enter.  Transfers 
made  by  agents,  executors,  trustees,  etc.,  must  have  proper 
authority  accompanying. 


BANK    ACCOUNTING  257 

A  record  of  stockholders  should  be  kept,  by  name,  ad- 
dress, number  of  shares  held,  when  issued  and  address.  As 
changes  are  made,  the  list  is  changed,  so  that  a  correct  list 
of  stockholders  is  always  at  hand,  the  total  number  of  shares 
outstanding  being  the  amount  of  the  capital  of  the  bank. 

DIVIDENDS 

Before  declaring  dividends,  the  earnings  of  the  bank  for 
the  period  must  be  ascertained,  the  expenses  paid  and  ac- 
crued deducted,  losses  charged  off,  and  from  the  net  profits 
the  dividend  may  be  declared,  after  passing  to  surplus  fund 
the  amount  required  by  law.  The  law  usually  stipulates 
what  the  minimum  surplus  shall  be  and  what  portion  of 
the  profits  shall  be  carried  to  surplus  until  it  reaches  that 
figure.  After  this  has  been  done,  the  dividend  may  be  de- 
clared as  the  profits  warrant. 

After  being  authorized  by  the  board,  the  amounts  are 
set  opposite  the  various  names  entitled  thereto,  as  of  a  cer- 
tain date  (no  transfers  being  made  for  a  certain  length  of 
time  in  order  to  allow  for  the  closing  of  the  books  and  the 
paying  of  the  dividend  to  the  proper  persons)  and  checks 
mailed  to  the  various  stockholders.  The  total  amount  of 
shares  listed  must  correspond  with  the  total  stock  authorized, 
and  the  total  of  the  checks  equal  the  dividend.  The  divi- 
dend checks  are  usually  distinctive  checks,  indicating  that 
they  are  dividend  checks,  and  after  the  dividend  has  been 
credited  to  "Dividend"  in  the  general  ledger,  the  checks  are 
charged  against  it  as  they  come  in,  the  unpaid  checks  repre- 
senting the  "unpaid  dividends"  on  the  liability  side  of  the 
statement. 

Reports  of  dividends  are  usually  required  by  the  super 
vising  authorities,  the  intent  being  to  check  the  extrava- 
gance of  the  bank  in  respect  to  its  distribution  of  profits. 

THE  BOOKS  OF  RECORD 

The  books  of  record  of  a  bank  may  vary  to  a  certain  de- 
gree, according  to  the  size  of  the  bank,  but  there  are  certain 
records  that  must  be  kept  by  all  banks,  whatever  their 
methods  or  however  small  the  bank  may  be.  It  is  impossible 
to  conduct  a  bank  without  them.  As  the  business  grows 


258  THE   PRACTICAL  WORK  OF   A   BANK 

and  is  divided  and  sub-divided,  other  books  will  be  used,  but 
they  are  merely  offshoots  of  the  original  forms.  The  neces- 
sary books  are:  The  minute  book  to  record  the  proceedings 
of  the  board  meetings  (there  may  also  be  various  minute 
books  for  committees) ;  the  stock  certificate  book;  stock  reg- 
ister and  transfer  book;  stock  ledger;  the  general  cash  book 
or  journal;  the  general  ledger;  daily  statement  book;  certifi- 
cate of  deposit  register;  cashier's  check  register;  register  of 
drafts  issued;  individual  or  dealers'  ledgers;  check  and  de- 
posit scratchers;  discount  and  loan  registers;  maturity  tick- 
lers; liability  book;  offering  book;  note  tickler;  collection 
register;  teller's  settlement  books  (teller's  cash) ;  dividend 
book  and  payroll,  etc. 

The  uses  of  these  books  will  be  apparent  as  the  work  pro- 
gresses, and  description  of  either  their  form  or  purpose 
would  be  needless  repetition  here. 

The  main  books  of  record  are:  (a)  The  journal,  which  is 
a  chronological  record  of  the  transactions  which  take  place. 
When  these  transactions  are  assembled,  sorted  out  as  it  were, 
each  class  by  itself,  we  have  (b)  the  ledger,  which  is  an 
assembly  of  journal  entries.  The  ledger  may  be  a  general 
ledger,  an  individual  ledger,  an  investment  ledger,  a  mort- 
gage ledger;  but  it  is  merely  the  assembly  of  journal  entries 
in  some  form;  which  journal  entries  are  transcripts  of  or  the 
original  entries,  but  most  likely  transcripts  of  some  form 
of  original  entry,  such  as  the  deposit  tickets,  collection  or 
discount  tickets  made  at  the  time  of  the  original  transaction. 
And  all  the  accounts  come  together  in  large  banks  and  small 
in  the  (c)  statement  book. 

THE  GENERAL  JOURNAL 

The  general  journal  is  the  aggregation  of  all  the  work 
of  the  bank  for  the  day  in  bulk,  as  the  other  journal  records 
are  the  aggregation  of  the  individual  transactions.  It  bal- 
ances the  work  of  the  whole  bank,  as  the  other  books  balance 
the  work  of  a  single  department.  From  the  various  depart- 
ments, or  from  the  various  books  of  the  bank,  these  items 
are  assembled  on  the  journal  for  proving  purposes  and  also 
for  the  purpose  of  carrying  to  the  general  ledger.  Thus,  the 
receipts  from  depositors  will  be  entered,  either  from  the 
teller's  window  list,  or  from  the  receiving  teller's  depart- 


BANK    ACCOUNTING 


259 


ment;  payments  from  the  paying  teller.  Discounts  are 
taken  from  the  discount  clerk  or  discount  register.  Drafts 
issued,  expenses  paid,  interest  received,  etc.,  are  properly 
recorded,  so  that  in  the  final  test  everything  that  has  gone 
through  the  bank  for  the  day  will  be  entered.  Of  course, 


GENERAL    BALANCE    JOURNAL 


each  item  could  be  so  entered,  and  some  savings  banks  do 
enter  every  deposit  and  every  draft,  every  check  drawn  and 
each  item  of  interest ;  but  it  answers  the  same  purpose  to  do 
so  in  bulk,  making  the  original  entry  at  the  window  or  at 
the  place  of  receipt.  When  the  work  of  the  day  is  over, 
each  department  reports  to  the  journal  clerk  its  receipts  for 
the  day  and  its  payments,  or  the  difference,  and  the  work  of 
the  whole  must  balance  as  has  the  work  of  each  branch.  As 
soon  as  the  journal  balances  the  work  for  many  of  the  em- 


260  THE    PRACTICAL   WORK   OF   A   BANK 

ployees  is  over.    The  difference  between  the  two  sides  of  the 
journal  is  the  cash  balance  on  hand. 

From  the  journal  the  entries  are  posted  to  the  general 
ledger.  Where  the  work  is  voluminous  a  journal  may  be 
kept  for  each  class  of  business,  as,  for  instance,  the  "foreign 
journal"  is  the  journal  for  out-of-town  accounts.  These  in 
some  banks  are  numerous  and  inasmuch  as  each  correspond- 
ent has  a  debit  and  credit  each  day,  these  records  necessi- 
tate much  space  and  can  best  be  kept  separately,  and  the 
controlling  figures  passed  through  the  general  journal. 
There  may  be  a  debit  and  a  credit  journal,  and  still  further 
divided  into  groups  by  alphabetical  or  geographical  ar- 
rangement. 

THE  EQUATION  or  ACCOUNTING 

All  accounting  records  are  based  upon  the  principle  that 
there  shall  be  an  equilibrium;  that  the  business  is  always  in 
a  state  of  balance.  For  every  asset  there  must  be  a  corre- 
sponding liability.  If  an  asset  is  increased  some  liability 
must  be  increased.  If  an  asset  is  reduced,  some  liability  is 
reduced.  If  one  asset  or  liability  is  increased  another  may 
be  reduced.  If  cash  goes  out,  a  liability  is  reduced;  if  it 
comes  in,  assets  are  increased  and  liabilities  likewise.  There 
may  be  a  shifting  about,  but  unless  the  affairs  are  in  bal- 
ance error  has  been  made  somewhere  that  must  be  corrected 
by  another  entry  to  effect  the  balance.  And  until  the  bank 
man  learns  the  fundamentals  involved  in  the  brief  statement 
of  accounting  principles  above  given,  he  cannot  keep  a  set 
of  books. 

The  equation  of  all  accounting  is:  Assets  minus  liabilities 
equals  capital. 

You  may  state  this  in  several  ways  and  it  always  re- 
mains true.  Assets  minus  capital  equals  liabilities.  Liabilities 
plus  capital  equals  assets.  And  the  bank  man  must  know 
this,  or  he  will  never  keep  his  books  in  balance.  And  be- 
sides he  must  know  what  is  an  asset  or  asset  value,  and  why, 
and  what  is  a  liability  and  why.  When  he  pays  the  salaries, 
he  carries  the  item  for  a  time  on  the  asset  side  because  he  has 
set  up  a  nominal  asset  to  take  the  place  of  the  real  asset 
(cash)  which  has  gone  out.  And  when  he  receives  interest 
he  makes  it  appear  as  a  liability,  because  he  has  increased 
his  assets  and  must  have  a  liabilitv  to  offset.  And  thus  there 


BANK    ACCOUNTING  261 

is  a  constant  offsetting  of  debits  and  credits,  so  that  the 
statement  is  always  in  balance;  and  to  keep  it  so  is  the  art 
of  batik  accounting. 

THE  STATEMENT  OF  CONDITION 

The  financial  condition  of  all  concerns  is  expressed  in  the 
statement  of  condition.  In  mercantile  or  trading  concerns 
this  is  made  periodically;  but  in  banks  it  is  made,  as  a  rule, 
daily,  reported  to  the  authorities  as  called  for  and  published 
as  the  law  requires.  This  does  not,  however,  always  express 
the  true  condition,  for  the  element  of  accrued  earnings  is  not 
generally  given  in  banks  of  discount,  but  is,  as  a  rule,  in  sav- 
ings and  investment  institutions.  Neither  is  accrued  inter- 
est payable  stated,  but  for  general  purposes  the  statement 
gives  all  the  information  usually  desired,  leaving  it  for  peri- 
odical audits  and  examinations  to  determine  the  technically 
correct  condition. 

The  records  of  all  banks  agree  in  their  essentials.  There 
may  be  a  few  books  of  record  under  a  single  man,  or  there 
may  be  many  under  many  men.  but  when  these  records  come 
together  in  the  statement,  there  is  a  unity  of  arrangement 
and  classification. 

PURPOSE  OF  THE  STATEMENT 

The  statement  of  condition  has  two  purposes  in  mind: 
(a)  To  show  the  bank  to  be  in  a  state  of  equilibrium,  and 
that  all  assets  and  liabilities  have  been  accounted  for  (ex- 
cept it  may  be  a  counterbalancing  error,  not  likely  to  happen 
often;  and  ^b)  to  guide  the  executive  officers  in  their  ad- 
ministration of  the  bank,  and  to  inform  the  public  and 
supervising  officials  of  the  condition. 

The  form  which  accounts  for  all  the  various  items,  and 
which  is  in  general  use  by  all  classes  of  banks  is  in  the  fol- 
lowing arrangement : 

ASSETS. 

1.  Loans  and  Discounts. 

2.  Overdrafts. 

3.  U.  S.  Bonds  to  Secure  Circulation. 

4.  U.  S.  Bonds  to  secure  Deposits  (par  value). 

5.  Other  Bonds  to  secure  U.  S.  Deposits. 

6.  U.  S.  Bonds  on  hand  (par  value). 


262  THE    PRACTICAL  WORK  OF   A   BANK 

7.  Premium  on  bonds  for  Circulation;  Premium  on  other  U.  S.  Bonds. 

8.  Bonds,  Securities,  etc.,  including  Premium  on  same. 

9.  Banking  House;  Furniture  and  Fixtures.  ^ 

10.  Other  Heal  Estate  Owned. 

11.  Due  from  National  Banks  (not  approved  Reserve  Agents). 

12.  Due  from  State  and  Private   Banks  and    Bankers,  Trust  Companies,   and 

Savings  Banks. 

13.  Due  from  approved  Reserve  Agents. 

14.  Due  from  Federal  Reserve  Bank. 

15.  Checks  and  other  Cash  Items. 

16.  Exchanges  for  Clearing  House. 

17.  Notes  of  other  National  Banks. 

J8.     Fractional  Paper  Currency,  Nickels,  and  Cents. 

19.  Lawful  Money  Reserve  in  Bank,     (a)  Specie;  viz.:  Gold  Coin,  Gold  Certifi- 

cates, Gold  Certificates  payable  to  order,  Clearing  House  Certificates, 
Silver  Dollars,  Silver  Certificates,  Fractional  Silver  Coin,  (b)  Legal 
Tender  Notes. 

20.  Redemption  Fund  with  U.  S.  Treasurer  (not  more  than  5%  on  Circulation) 

21.  Due  from  U.  S.  Treasurer. 

LIABILITIES. 

1.  Capital  Stock  paid  in. 

2.  Surplus  Fund. 

3.  Undivided  Profits   (including  sums,  if  any,  set  aside  for  special  purposes, 

except  reserve  for  taxes). 

4.  Circulating  notes  secured   by   U.   S.   Bonds    (less  amount  on  hand  and  in 

Treasury  for  redemption  or  in  transit.) 

5.  State  Bank  Circulation  outstanding. 

6.  Due  to  National  Banks  (not  approved  Reserve  Agents). 

7.  Due  to  State  and  Private  Banks  and  Bankers. 

8.  Due  to  Trust  Companies  and  Savings  Banks. 

9.  Due  to  approved  Reserve  Agents. 

10.  Dividends  unpaid. 

11.  Individual  Deposits  subject  to  check. 

12.  Savings  Deposits. 

13.  Demand  Certificates  of  Deposit. 

14.  Time  Certificates  of  Deposit. 

15.  Certified  Checks. 

16.  Cashiers'  Checks  outstanding. 

17.  United  States  Deposits. 

18.  Deposits  of  U.  S.  Disbursing  Officers. 

19.  Bonds  Borrowed. 

20.  Notes  and  Bills  rediscounted. 

21.  Bills  payable,  including  Certificates  of  Deposit  for  money  borrowed. 

22.  Reserved  for  Taxes. 

23.  Liabilities  other  than  those  stated. 
(See  p.  318h.) 

To  understand  the  various  items  that  go  to  make  up  a 
hank  statement  is  to  understand  bank  accounting,  and  each 
item,  therefore,  will  be  traced  to  its  source  to  see  what  it 
represents. 

ASSETS 

1.  Loans  and  Discounts. — This  represents  the  amount 
the  bank  has  loaned  either  on  straight  loans  or  by 
way  of  discounting  paper  of  its  customers.  As  loans  are 
made  and  paid  off,  record  is  made  in  the  discount  depart- 


BANK    ACCOUNTING 


ment  or  on  the  loan  journal,  the  total  being  carried  to  the 
general  journal,  thence  to  the  general  ledger,  and  from  there 
to  the  statement  book. 

National  banks  are  required  to  report  their  loans  by 
classes,  as  (a)  "Demand  Loans,"  one  or  two  names;  (b) 
"Demand  Loans,"  secured  by  collateral ;  (c)  "Time  Loans," 
two  or  more  names;  (d)  "Time  Loans,"  single  name;  (e) 
"Time  Loans,"  secured  by  collateral.  The  ledger  account 
should  correspond  with  this  classification. 

2.  Overdrafts. — This  item  is  made  up  of  amounts  by 
which  depositors  have  overdrawn  their  accounts,  and  is  in 


OVERDRA 
D/ 

FTS 
.TF 

NAME 

ADDRESS 

AMOUNT 

AVERAGE 
BALANCE 

REMARKS 

1 

BOOKKEEPER'S  REPORT  OF  OVERDRAFTS 

the  nature  of  loans  without  interest  or  security ;  and  since  the 
bank  has  paid  value  for  them,  they  must  appear  as  an  asset, 
to  measure  the  indebtedness  of  the  depositors  to  the  bank  as 
contra  distinguished  from  the  debt  due  the  depositors  were 
the  balance  due  to  and  not  due  from  the  depositors.  To 
effect  the  balance,  the  individual  deposits  are  increased  by 
the  same  amount,  the  total  being  the  gross  deposits.  This 
item  is  not  carried  on  the  general  ledger,  as  a  rule,  the  fig- 
ures being  obtained  from  the  ledger  bookkeepers  who  make 
notations  of  overdrafts,  and  report  to  the  general  ledger 
bookkeeper,  who  also  keeps  a  record  of  these  amounts.  If 
the  net  deposits  only  were  shown  as  a  liability,  the  amount 
due  to  the  bank  from  depositors  who  have  overdrawn  would 
not  appear  as  a  resource,  which  it  properly  represents.1 

*By   a  recent    ruling   by    the    Comptroller    of    the    Currency    overdrafts    in 
national  banks  are  now  forbidden. 


264  THE    PRACTICAL  WORK   OF    A   BANK 

3.  U.  S.  Bonds  to  Secure  Circulation. 

4.  U.  S.  Bonds  to  Secure  Deposits. 

5.  Other  Bonds  to  Secure  U.  S.  Deposits. 

6.  U.  S.  Bonds  on  Hand. 

National  banks  upon  their  organization  are  required  to 
invest  a  certain  portion  of  their  capital  in  United  States 
bonds,2  against  which  they  may  issue  their  notes.  That  is, 
upon  purchasing  bonds  and  depositing  them  with  the  Treas- 
ury Department,  circulating  notes  are  issued  to  the  bank  in 
the  par  amount.  The  bank,  therefore,  draws  interest  on  the 
bonds  and  when  the  notes  are  paid  out  in  the  form  of  loans, 
the  bank  receives  interest  on  the  loan  also,  thus  making  ad- 
ditional profit.  Thus,  if  the  bank  draws  interest  on  the  loan 
at  six  per  cent.,  and  two  per  cent,  on  the  bonds,  it  is  getting 
eight  per  cent,  on  the  money;  but  the  cost  attending  the 
issue  of  bank  notes  reduces  the  profit  on  the  bonds  to  about 
one  and  a  half  per  cent.,  and  many  banks  do  not  take  out 
more  circulation  than  the  law  requires,  while  others  take  out 
large  amounts. 

Before  a  bank  may  obtain  a  deposit  of  Government 
funds,  it  must  lodge  with  the  Treasury  Department  security 
in  the  form  of  bonds,  either  United  States  or  other  bonds, 
and  items  four  and  five  represent  these  bonds  which  belong 
to  the  bank,  but  are  held  in  Washington  for  its  account. 
United  States  bonds  on  hand  merely  means  bonds  which  the 
bank  owns  and  has  in  its  vaults  and  unpledged  either  for  de- 
posits or  for  currency  purposes. 

7.  Premium  on  Bonds  for  Circulation;  Premium  on 
Other  U.  S.  Bonds. — This  represents  the  premium  paid  on 
bonds,  the  securities  being  carried  at  par.     The  premium  is 
really  part  of  the  cost  of  the  bonds,  and  a  part  of  the  mar- 
ket value.    But  it  is  the  rule  in  many  banks  to  carry  securi- 
ties  (especially  "Governments")    at  par  and  the  premium 
separately.    This  is  charged  off  from  time  to  time  as  condi- 
tions warrant. 

8.  Bonds,,  Securities,  etc.,,  Including  Premium  on  the 
Same. — This  represents  other  bonds  and  stocks  held  by  the 
bank,  and  includes  the  premium,  which  makes  the  amount  of 
par  and  premium  their  cost,  which  should  be  scaled  by  the 
process  of  amortization  so  that  the  bonds  stand  on  the  books 

2  Repealed  by  the  Federal  Reserve  Act. 


BANK    ACCOUNTING  265 

at  their  present  investment  value  as  determined  by  amortiza- 
tion, the  deductions  on  premium  bonds  and  additions  to  dis- 
count bonds  being  made  from  time  to  time  so  that  the  pres- 
ent investment  value  is  shown.  Especially  is  this  true  of 
bonds  for  permanent  investment.3 

9.  Banking  House,  Furniture  and  Fixtures. — This  rep- 
resents the  real  estate  occupied  by  the  bank  as  its  banking 
house,  the  cost  of  the  furniture  and  fixtures,  vaults,  etc., 
which  should  be  properly  scaled  down  from  profits,  until  the 
furniture  is  entirely  eliminated,  or  if  held  at  all,  only  at 
second-hand  prices,  and  the  real  estate  at  its  fair  market 
value. 

10.  Other  Real  Estate  Owned. — Banks  are  not,  as  a 
rule,  permitted  to  hold  real  estate,  except  for  banking  pur- 
poses, unless  the  same  be  taken  for  debts  due  the  bank.  They 
cannot  acquire  it  as  an  investment,  and  consent  of  authorities 
is  necessary  to  hold  for  a  period  of  time.    Real  estate  is  not 
a  good  banking  asset,  and  the  reason  why  so  many  private 
banks  and  bankers  have  come  to  grief  is  the  fact  that  they 
have  invested  in  real  estate,  first  and  second  mortgages,  and 
tied  up  deposits  payable  on  demand  in  a  long-time  and  un- 
liquid  security.    Real  estate  is  a  precarious  investment  and 
is  well  tabooed  in  banking  circles. 

11.  Due  from  National  Banks  not  Reserve  Agents.— 
This  represents,  in  national  banking  circles,  the  amount  due 
from  banks  that  are  not  reserve  agents,  on  deposit  account, 
items  charged  to  other  banks  and  in  process  of  collection, 
and  overdrafts  of  banks  (not  included  in  overdrafts  of  cus- 
tomers) ;    balances    due    from    other   banks    against   which 
drafts  are  sold. 

12.  Due  from  State  Banks,,  Bankers,  etc. — These  are 
balances  of  the  same  nature  as  the  above,  due  from    State 
banks,  bankers  and  trust  companies,  against  which  the  de- 
positing bank  draws  its  drafts,  and  to  which  it  sends  its 
collection  items. 

13.  Due  from  Approved  Reserve  Agents. — Before  a 
bank  can  act  as  a  reserve  agent  for  another  as  the  law  re- 
quires, or  at  least  allows,  consent  must  be  obtained  from  the 
governing  authority,  unless  the  law  makes  the  provision  gen- 

3For  full  discussion  of  this  principle  see  chapter  on  "Bond  Accounting  in 
Theory  and  Practice"  in  "The  Savings  Bank  and  its  Practical  Work,"  by  the 
author. 


266  THE   PRACTICAL  WORK   OF   A   BANK 

eral.  In  national  banks  the  consent  of  the  Comptroller  of 
the  Currency  is  necessary,  and  in  order  to  determine  the 
amount  of  these  balances  with  approved  agents,  and,  there- 
fore, allowable  in  the  reserve  account,  they  are  reported  sep- 
arately. 

14.  Due  from  Federal  Reserve  Bank  represents  the 
reserve  carried  with  the  Federal  Reserve  Bank  of  the  dis- 
trict, and  is  of  the  same  nature  as  No.  13. 

15.  Checks  and  Other  Cash  Items. — This  includes  all 
checks  and  other  items  which  must  be  collected  by  messenger, 
or  which  for  some  reason  or  other  cannot  be  sent  out  for 
payment  or  charged  to  some  account,  but  must  be  held  in 
the  cash.    They  should  never  be  items  for  money  advanced, 
"I.  O.  U.'s"  or  anything  of  the  sort.     The  cash  should  be 
"clean." 

16.  Exchanges  for  the  Clearing -House. — This  is  the 
amount  of  the  checks  and  other  items  that  will  be  sent  to  the 
clearing-house  the  next  morning,  and  for  which  payment 
will  be  made  the  next  day. 

17.  Notes  of  Other  National  Banks. — These  are  nation- 
al bank  notes  separated  from  the  notes  of  the  issuing  bank 
and  reported  independently.    In  national  banks  they  cannot 
count  as  reserve,  but  may  in  State  institutions.* 

18.  Fractional  Paper  Currency,  Nickels  and  Cents. — 
The  fractional  paper  currency  is  a  relic  of  the  Civil  War, 
and  a  few  of  these  old  notes  for  less  than  one  dollar  are  still 
in  circulation,  or  held  by  banks  as  souvenirs.     They  are  an 
obligation  of  the  Government  and  are  still  good.    One  bank 
has  carried  seventy-five  cents'  worth  of  these  on  its  daily 
statement  for  nearly  thirty  years. 

19.  Lawful  Money  Reserve. — This  is  the  lawful  reserve 
of  the  bank,  and  includes :  Gold  and  silver  coin,  gold  certifi- 
cates, gold  certificates  payable  to  order,  clearing-house  cer- 
tificates, silver  dollars,  silver  certificates,  fractional  silver 
coin,  legal  tender  notes  (greenbacks),  and  Federal  Reserve 
Notes. 

20.  Redemption  Fund  with  the  U.  S.  Treasurer.    (Not 
More  than  Five  Per  Cent,  of  the  Circulation). — National 
banks  are  required  to  keep  on  deposit  with  the  Treasurer  at 
Washington  a  fund  of  five  per  cent,  of  the  circulation  to  re- 

*The  reserves  of  banks  that  are  members  of  the  Federal  Reserve  System  are 
now  carried  with  the  Federal  Reserve  Bank  of  the  district  Cash  in  vault  is 
optional. 


BANK    ACCOUNTING  267 

deem  the  notes  as  presented  through  the  Treasury  Depart- 
ment. The  Treasurer  credits  notes  received  against  this 
fund,  and  charges  notes  issued,  and  this  fund  is  part  of  its 
reserve.  Upon  advice  from  Washington  that  a  certain 
amount  of  notes  have  been  redeemed,  or  retired,  the  bank's 
circulation  account  is  charged  and  the  redemption  fund  is 
credited.  The  fund  must  be  kept  at  five  per  cent.4 

21.  Due  from  the  U.  S.  Treasurer. — This  is  a  transit 
account  for  currency  which  may  be  mutilated  or  good,  sent 
to  Washington  for  redemption.  When  currency  is  sent  out 
it  is  charged  to  this  account  and  when  returned  the  account 
is  credited  with  the  amount. 

In  the  accounts  with  banks,  as  listed  above,  the  following 
remarks  are  opportune: 

Remittances  of  cash  items  are  charged  as  of  the  date 
when  sent  out  and  appear  in  the  balance  although  en  route. 
Collection  items  are  charged  only  on  receipt  of  advice.  When 
currency  is  shipped  it  is  charged  to  the  bank  upon  memo, 
from  the  paying  teller.  Drafts  on  banks  are  credited  in 
total  from  the  draft  records. 

Where  no  account  is  kept  with  a  bank  and  the  item  is 
sent  out  as  cash,  it  is  charged  to  a  "transit  account"  or  some 
similar  name,  to  indicate  items  out  in  the  process  of  collec- 
tion, and  not  sent  to  regular  correspondents. 

LIABILITIES 

The  liabilities  of  a  bank  are  of  three  classes:  (a)  Liabil- 
ity to  the  owners  or  stockholders;  (b)  liability  to  the  depos- 
itors and  to  other  banks;  (c)  liability  on  its  notes. 

1.  Capital  Stock. — This  measures  the  proprietary  inter- 
est of  the  owners.  The  amount  is  regulated  by  law  and  the 
bank  in  its  organization  must  have  the  required  capital  paid 
in  in  cash.  The  record  of  these  payments  is  made  in  the 
capital  stock  account,  and  the  evidence  of  the  interest  of  the 
stockholders  is  the  stock  book,  which  has  a  record  of  all  stock 
issued  and  cancelled.  Stock  is  issued  in  shares,  and  there 
should  always  be  the  authorized  number  of  shares  out- 
standing. 

The  stockholders  are  the  owners,  entitled  to  the  profits 
and  liable  for  the  losses,  and  capital  is  always  a  liability.  It 
is  the  debt  which  the  corporation  as  a  corporation  owes  the 
stockholders.  They  cannot,  of  course,  collect  this  debt. 

4Tbe  Federal  Reserve  Act  repeals  the  reserve  effect  of  this  fund. 


268  THE    PRACTICAL   WORK   OF    A    BANK 

There  is  no  process  by  which  a  stockholder  can  compel  the 
corporation  to  give  him  back  his  investment.  He  can  only 
surrender  his  ownership  by  transferring  his  shares  to 
another,  and  the  stock  records  show  such  transfers. 

2.  Surplus. — This  may  consist  of  amounts  originally 
contributed  by  the  stockholders  in  addition  to  their  stock.  It 
is  additional  protection  to  the  depositors.  When  a  bank  is 
started,  it  frequently  happens  that  the  stock  will  be  offered 
at,  say,  $125  per  share.  The  $100  is  carried  to  capital  ac- 
count and  the  $25  to  surplus  fund.  The  stockholder  thus 
contributes  a  bonus  of  $25,  hoping  the  bank  will  become  so 
prosperous  that  the  stock  will,  as  an  investment,  be  worth 
$125  or  more  on  the  market. 

The  surplus  also  includes  the  profits  of  the  bank  which 
have  not  been  paid  out  in  dividends.  As  a  rule  banks  are 
required  to  set  aside  from  earnings  a  certain  portion  before, 
dividends  are  declared,  this  going  to  the  surplus  fund  until 
it  reaches  a  certain  percentage  of  the  capital.  The  surplus 
affords  additional  working  capital  on  which  no  dividends 
are  paid,  and  is  one  of  the  highly  protective  features  of 
banking  and  all  banks  strive  to  accumulate  a  surplus  of  con- 
siderable magnitude.  It  is  an  evidence  of  good  management. 
The  surplus  fund  is  more  or  less  stationary,  additions  being 
made  from  time  to  time  out  of  undivided  profits. 

Some  banks  have  large  capital  and  large  surplus  funds; 
others  have  small  capital  and  large  surplus  funds,  the  most 
notable  being  the  Chemical  National  Bank  of  New  York, 
which  until  1907  had  capital  of  $300,000  and  an  enormous 
surplus,  and  for  that  reason  its  stock  was  selling  at  about 
$4,400;  but  the  capital  has  since  been  increased  by  stock  div- 
idends to  $3,000,000  so  that  the  present  capital  is  $4,500,- 
000.00  and  surplus  $15,000,000.00 — making  a  very  strong 
institution. 

It  stands  to  reason  that  a  bank  whose  capital  and  sur- 
plus is,  say,  a  million  dollars,  and  whose  debts  (deposits) 
are  five  millions,  is  stronger  than  the  bank  which  has  but 
half  as  much  capital  and  surplus  and  the  same  liability;  for 
in  the  former  case,  the  bank  must  lose  a  million  before  its 
depositors  would  be  injured,  while  in  the  other  case  a  loss 
of  half  as  much  would  affect  the  depositors.  The  pride  of 
banking  is  to  have  a  large  capital,  ample  surplus,  and  to 
build  up  the  latter  out  of  earnings,  thereby  increasing  the 


BANK    ACCOUNTING  269 

value  of  the  shares  as  well  as  offering  added  protection  to 
depositors. 

3.  Undivided  Profits. — The  undivided  profits  represent 
the  bank's  undistributed  earnings.  The  profits  arise  from 
the  loans  and  investments,  interest  paid  on  balances  in  other 
banks,  and  exchange  charges  received  for  drawing  drafts,  or 
collected  from  its  customers.  The  following  are  the  charges 
against  the  earnings :  Overhead  expenses,  such  as  rent,  light, 
taxes,  salaries,  together  with  stationery,  interest  paid  on  de- 
posits, exchange  paid  for  collecting  checks,  losses.  The  bal- 
ance is  the  undivided  profits,  from  which  additions  are  made 
to  surplus.  The  undivided  profits'  account  is  the  profit  and 
loss  account  of  the  bank,  to  which  are  carried  the  earnings 
and  against  which  are  charged  the  expenses  and  the  resul* 
is  the  net  profits. 

4s.  Circulating  Notes  Issued,  Secured  by  Bonds. — As 
was  said  under  the  resource  item  corresponding  to  this,  be- 
fore notes  can  be  issued  bonds  have  to  be  purchased  and 
lodged  with  the  Treasurer  at  Washington.  After  the  cur- 
rency notes  have  been  issued  by  the  Comptroller  of  the  Cur- 
rency they  are  sent  to  the  bank  and  signed  by  the  proper 
officers  and  placed  in  the  till  for  paying  out.  They  are,  like 
the  deposits,  a  liability  of  the  bank.5  Notes  on  hand,  in 
Washington  for  redemption,  or  in  transit  must  be  deducted 
and  only  net  amount  outstanding  shown. 

5.  State  Bank  Circulation. — This  no  longer  obtains, 
there  being  a  tax  of  ten  per  cent,  on  State  bank  issues  and 
none  are  now  in  circulation. 

6.  Due  to  National  Banks  not  Reserve  Agents. — This 
is  the  amount  due  other  national  banks  on  open  account, 
items  received  for  collection  as  cash,  and  for  which  credit 
has  been  given. 

7.  8,  9.    Due  State,  Private,  Savings  Banks,  Trust 
Companies,   and  Approved  Reserve  Agents. — These   are 
the  balances  due   other  banks,   against  which   drafts   are 
drawn  by  them  and  on  which  interest  is,  as  a  rule,  paid. 
Amounts  due  savings  banks  and  trust  companies  are  report- 
ed separately  to  the  Comptroller.    Overdrafts  of  banks  are 
not  regarded  as  overdrafts,  but  amounts  due  to  or  from 
banks;  hence  the  liability  must  include  the  overdrafts  of  the 

BSee  under  bank  notes,  chapter  2. 


270 


THE   PRACTICAL  WORK  OF   A   BANK 


bank,  and  the  asset  side  show  the  amount  included  in  the 
amounts  due  from  banks. 

9.  Due  to  Approved  Reserve  Agents. — This  has  al- 
ready been  sufficiently  explained.    It  is  segregated  in  order 
to  determine  the  net  liability  of  the  reserve  agents'  account. 

10.  Dividends  Unpaid. — When  a  dividend  is  declared 
it  is  charged  to  the  undivided  profits  and  credited  to  divi- 
dend account.     Checks  are  mailed  to  stockholders,  and  as 
presented  are  charged  to  the  dividend  account.    The  balance 
is  represented  in  this  item.     Dividends  are  frequently  un- 
paid for  years. 

11.  Individual  Deposits  Subject  to  Check. — This  is  the 


25614 


SF~         od  •  ••%> 

f  .Aay^Jfy&AtMrtyfr     S*      T^^Ti^g^y 

^»/^^f^n^^m^^^^^^%«^e^/^^>^e(^;^ 


nl.r.il  will  b.  paid  on  thi»  Ctrtifii 
>  rate  of  thrM  per  cunt,  ptr  annum  If  left 
ir  month*,  and  four  per  c.nt.  If  left  iix 
nthi.  No  Intomt  after  six  month*. 


CERTIFICATE    OF   DEPOSIT 


principal  item  of  a  bank's  liability.  It  may  arise  from  de- 
posits of  cash  or  checks,  or  from  the  proceeds  of  loans  which 
are  credited  to  the  checking  accounts;  but  it  is  the  chief  lia- 
bility of  the  bank  and  all  but  the  time  deposits  are  payable 
on  demand. 

The  custom  is  to  show  only  the  net  individual  deposits  on 
the  general  ledger.  This  is  the  deposits  less  overdrafts.  The 
overdrafts  are,  as  before  stated,  really  a  loan  without  secu- 
rity. The  statement  shows  the  gross  liabilities,  and  contra 
on  the  asset  side  the  overdrafts  which  effect  the  balance.  In 
a  pamphlet  on  bank  accounting  issued  by  the  American  In- 
stitute of  Banking,  it  is  stated  in  this  regard: 

"It  is  not  possible  for  the  general  ledger  bookkeeper 
having  before  him  the  daily  statement  of  the  previous  day 
and  the  total  debits  and  credits  of  the  current  date  to  deter- 


BANK    ACCOUNTING  271 

mine  the  amount  of  the  overdrafts  and  the  individual  de- 
posits. He  can,  however,  determine  the  deposits  less  over- 
drafts and  this  he  does  in  the  general  ledger.  Later,  when 
he  receives  from  the  individual  bookkeeper  a  memorandum 
of  the  amounts  of  the  overdrafts,  he  enters  that  amount  in 
the  daily  statement  and  increases  his  ledger  balance  in  the 
deposit  account  by  that  amount  for  the  daily  statement." 

12.  Savings  Deposits. — These  are  the  deposits  received 
in  the  savings  department,  subject  to  withdrawal,  generally 
upon  notice,  and  represented  by  pass-books.     The  totals 
are  received  from  the  savings  tellers  and  carried  to  the  gen- 
eral ledgers  as  in  the  case  of  individual  deposits.    There  are 
no  overdrafts. 

13,  14.     Certificates   of   Deposit. — These   are   of   two 
classes:  (a)  Demand  and  (b)  Time.    These  certificates  are 
in  the  nature  of  savings  deposits,  left  with  the  bank  on  in- 
terest and  for  which  a  receipt  in  the  form  of  a  "Certificate 
of  Deposit"  is  issued,  which  promises  to  pay  the  amount 
upon  demand  or  at  a  stated  time. 

15.  Certified  Checks. — These  are  the  checks  which  the 
bank  has  certified  and  become  liable  for  payment.     They 
are,  when  certified,  charged  to  the  drawer's  account  and 
carried  to  the  certified  check  account,  and  the  balance  due  on 
these  items  here  appears.  The  checks  when  paid  are  charged 
to  the  account  and  the  amounts  reported  to  the  general 
ledger  bookkeeper  for  his  records. 

16.  Cashier's  Checks  Outstanding. — A  cashier's  check 
is  an  order  drawn  by  the  bank  on  itself.    They  are  issued 
for  paying  the  bank's  expenses,  and  other  expenditures,  and 
are  often  issued  for  local  purposes  in  lieu  of  a  New  York 
draft,  and  are  sometimes  exchanged  for  the  customer's  check 
in  preference  to  making  a  certification.    In  some  places  this 
is  quite  common.    A  cashier's  check  account  is  kept  in  de- 
tail and  the  amounts  issued  and  paid  are  reported  to  the 
general  ledger  bookkeeper  for  making  his  statement. 

17.  18.     United  States  Deposits,  etc. — These  are  de- 
posits of  the  United  States  from  funds  in  the  Treasury,  or 
from  customs  duties,  taxes,  etc.,  or  any  other  source,  and 
for  which  the  bank  has  lodged  bonds  as  security,  as  men- 
tioned on  the  resource  side  of  the  statement.     Postal  sav- 
ings deposits  are  in  this  class  and  are  usually  reported 
separately. 

18 


w 

oa 


c£ 
PJ 


GO 

O 
uu 

a; 


CO 

O 

CL 
UJ 

Q 

a. 
O 

u-j 


y 

S: 

H 

o^: 

UJ 

u 


r° 

2 


rt 

Q 


s 

H 


CQ 

Q 

u 

H 


O 

a- 


BANK    ACCOUNTING  278 

19.  Bonds  Borrowed. — It  sometimes  happens  that  a 
national  bank  will  borrow  bonds  to  secure  its  circulating 
notes  rather  than  buy  them.  A  fee  is  paid  to  the  owner  for 
their  use  and  security  given.  These  bonds  are  reported  sep- 
arately, since  they  are  not  the  property  of  the  bank.  The 
bonds  appear  on  the  other  side  of  the  statement  among  the 
bonds  deposited  with  the  Treasurer,  and  the  liability  is  here 
shown. 

20S  21.  Rediscounts  and  Bills  Payable. — It  frequently 
happens  that  a  bank  will  have  call  for  more  money  than  it 
has  to  spare.  It  cannot  credit  a  loan  on  deposit  account,  for 
by  so  doing  it  would  reduce  its  reserve  below  the  required 
amount.  It  cannot  pay  out  the  cash,  for  this  effects  the 
same  result.  It,  therefore,  must  turn  into  money  some  of 
its  securities,  either  by:  (1)  Calling  upon  borrowers  whose 
loans  are  due  to  pay.  This  will  bring  in  cash,  or  reduce  its 
liabilities  by  reducing  deposits;  (2)  selling  securities,  and 
it  may  be  take  a  loss;  (3)  selling  outright  some  of  its  loans, 
and  so  anticipate  their  payment.  It  has  no  further  liability 
if  it  sells  "without  recourse";  (4)  rediscounting  some  of  its 
notes  and  bills.  This  is  the  European  custom.  If  it  retains 
any  liability  for  their  payment,  it  must  carry  the  amount  as 
a  contingent  liability.  This  it  does  by  the  item  of  "redis- 
counts." Of  course  if  they  are  actually  sold  without  liabil- 
ity, no  further  record  appears.  An  asset  has  gone  out  and 
in  its  place  has  come  another;  i.  e.,  loans  and  discounts  have 
been  reduced  and  cash  increased,  or  the  amount  due  from 
banks  added  to,  or  in  some  other  form  the  balance  has  been 
maintained,  and  it  has  available  funds  for  loan  purposes.  It 
may  sell  or  rediscount  outside  paper  for  loaning  in  the  home 
market.  Frequently  banks  rediscount  with  their  city  corre- 
spondents, and  under  the  Federal  Reserve  System  the  redis- 
count of  notes  and  commercial  paper  will  be  one  of  the  chief 
avenues  for  aid  in  times  when  banks  need  funds  and  the 
greatest  value  of  the  Federal  Banks  to  the  financial  opera- 
tions of  the  country  will  come  through  the  privilege  member 
banks  will  have  of  turning  their  good  assets  into  cash  by 
this  means;  (5)  by  borrowing  on  its  own  note  and  this  forms 
a  liability  reported  under  bills  payable. 

22.  Reserved  for  Taxes. — In  all  accounting  processes 
it  is  a  rule  that  accruing  obligations  shall  be  allowed  for, 
preferably  by  setting  aside  an  amount  to  cover  the  charge. 


274  THE    PRACTICAL  WORK  OF   A   BANK 

Taxes  and  other  yearly  charges  accrue  constantly.  It  is  not 
fair  to  say  that  suddenly  on  a  certain  date  the  amount  be- 
came due ;  for  part  was  due  each  day.  Just  the  exact  amount 
cannot  be  determined  until  the  tax  is  levied;  but  in  cases 
such  as  rent,  if  paid  yearly,  the  exact  amount  is  known,  and 
can  be  determined  as  a  liability  at  any  time;  therefore,  all 
well-managed  concerns  make  such  allowances,  and  banks 
create  a  book  liability  by  setting  up  an  account  called  "Re- 
served for  Taxes"  which  is  carried  and  added  to  from  time 
to  time,  until  the  amount  is  paid,  when  the  liability  disap- 
pears. The  amount  can  be  fairly  determined  from  past 
payments. 

23.  Oilier  Liabilities. — These  are  for  other  liabilities 
not  stated  or  covered  in  the  foregoing,  and  might  include 
salaries,  pensions,  interest  on  deposits  unpaid,  etc. 

We  have  thus  gone  through  a  statement  to  determine 
what  each  item  means,  where  it  came  from  and  what  its 
place  is  in  the  accounting  scheme. 

(Note  to  Third  Edition,  ««ee  p.  319h.) 

THE  BOOKKEEPING  FORCE 

The  individual  who  is  responsible  for  the  bookkeeping 
of  the  bank  may  be  termed  by  various  names,  such  as  head 
bookkeeper,  auditor,  chief  clerk,  comptroller,  assistant 
cashier,  etc.,  but  his  duties  are  in  the  main  the  same — to  keep 
the  bookkeeping  machinery  working  smoothly.  He  must- 
keep  the  statement  in  balance.  He  must  handle  the  men. 

The  head  of  the  accounting  force  comes  into  closer  con- 
tact with  the  rank  and  file  of  the  force  than  any  other  man 
in  the  bank.  He  is  immediately  responsible  for  what  they 
do,  and  is  the  "general"  who  uses  the  forces  supplied  him 
to  produce  certain  results.  It  is,  therefore,  proper  at  this 
point  to  discuss  the  force ;  how  it  is  recruited ;  how  governed, 
before  taking  up  what  it  does  in  a  mechanical  way. 

Most  banks  work  from  the  bottom  up,  to  a  large  extent, 
and  train  their  own  men.  Boys  are  taken  in  as  messengers 
at  from  fourteen  to  eighteen  years  of  age,  and  as  they  be- 
come familiar  with  their  surroundings  are  advanced  as  va- 
cancies occur,  if  in  the  opinion  of  their  superiors  such  ad- 
vancement is  warranted. 


BANK    ACCOUNTING  275 

THE  APPLICATION 

The  application  for  employment  is  usually  in  writing, 
both  to  test  the  handwriting  of  the  applicant  and  to  ascer- 
tain his  general  qualifications.  Some  banks  prefer  a  letter 
of  application  to  a  formal  document,  to  test  the  resourceful- 
ness of  the  applicant  and  the  way  he  goes  at  things.  If  the 
applicant  is  favorably  considered  lie  may  then  file  a  formal 
application  as  a  matter  of  record. 

After  this  application  has  been  received  in  formal  shape, 
it  becomes  necessary  to  check  the  statements  made  therein, 
and  this  is  done  by  communicating  with  the  references  given. 
This  may  be  done  by  a  letter  of  inquiry,  or  by  a  printed 
form  asking  certain  questions. 

It  is  opportune  to  say  here  that  it  is  sometimes  unfair 
to  the  applicant  to  judge  too  much  by  what  may  have  hap- 
pened in  another  place  of  employment,  without  knowing 
both  sides  of  the  story.  Of  course,  if  a  man  were  discharged 
for  indulgence  in  liquor,  this  is  an  obvious  fault;  but  if  it 
were  a  matter  of  temper  or  temperament,  he  might  under 
more  favorable  conditions  make  an  exceedingly  valuable 
employee.  Some  of  the  lamentable  failures  in  banking  are 
due  to  wrong  environment.  And  not  knowing  what  that 
environment  was,  we  cannot  pass  judgment,  or  at  least 
should  not  unjustly.  Some  banks  prefer  to  take  men  out  of 
employment;  for  if  they  do  not  fit,  they  are  no  worse  off; 
but  to  take  a  good  man  out  of  a  position  which  he  already 
fills  to  satisfaction  is  risky,  especially  for  him. 

AVAILABLE  MEN 

Inasmuch  as  most  banks  have  occasions  when  they  may 
need  men  at  short  notice  they  should  have  a  file  of  applica- 
tions, giving  the  general  qualifications  of  men  and  boys,  so 
that  when  the  need  comes  there  will  be  available  candidates. 
It  is  important  that  the  bank  have  the  experiences  of  those 
advanced  in  life  as  a  guide  to  what  they  have  done,  as  well 
as  an  indication  as  to  what  they  claim  to  be  able  to  do.  Boys 
should  be  investigated  particularly  as  to  their  home  life,  for 
this  is  the  essential  element.  A  boy  who  has  a  good  mother 
is  a  safe  risk.  The  boy  who  keeps  questionable  company,  is 
out  late  nights,  and  has  no  restraining  influences,  is  a 
doubtful  risk. 


276 


THE   PRACTICAL  WORK   OF   A   BANK 


IRVING  NATIONAL  BANK 

New  York,  191 

APPLICATION  FOR  EMPLOYMENT 

Full  name  of  applicant Age 

Residence 

Are  you  single,  married  or  a  widower? 

Do  you  live  with  your  parents? 

Do  you  own  or  rent  the  house  in  which  you  live,  or  do  you  board? 

Have  you  a  family?    If  so.  number  of  children,  and  number  of  persons  in  all  dependent  on  you  for  support? 

Are  you  at  present  employed  or  unemployed? 

If  unemployed,  how  long  have  you  been  out  of  employment? 

By  whom  were  you  last  employed? 

Their  address? 

How  long  were  you  in  their  employ? Salary? 

Why  did  you  leave? 

SERVICE    Or 
PU>««  Oil  coupon.™.)  KIASOH  rdll  UUVINO 

| 

Have  you  any  income  from  sources  other  than  that  of  the  salary  to  be  received? 

What  are  your  habits  in  regard  to  liquors  and  tobacco? 

Other  Reference*: 

It  is  understood  thnt  any  employment  is  to  be  by  the  month  and  from  month  to  month  only. 

(Signature) 

*"  '-  »* _____ , 

APPLICATION    FOR    EMPLOYMtST 


BANK    ACCOUNTING  877 

Some  banks  make  it  a  rule  to  obtain  help  by  advertising 
in  the  newspapers,  filing  application  with  the  Y.  M.  C.  A. 
and  other  high-grade  agencies,  never,  of  course,  giving  the 
name  of  the  bank.  This  is  often  done  to  prevent  directors 
from  favoring  their  friends.  From  the  answers  to  these  ad- 
vertisements applicants  are  interviewed  and  selections  made. 

The  knack  of  choosing  men  is  an  art  acquired  by  few. 
The  ability  to  get  men  who  can  do  things  better  than  your- 
self is  a  fine  science,  especially  if  in  the  doing  they  reflect 
credit  upon  themselves  and  you — and  you  do  not  become 
jealous.  First  impressions  count.  And  while  it  is  not  fair 
to  judge  a  man — or  a  boy — under  severe  nervous  strain,  the 
impression  is  important.  The  author  once  had  the  pleasure 
of  attending  a  meeting  of  an  organization  committee  of  a 
new  bank,  where  applicants  for  an  executive  position  were 
to  be  interviewed.  Man  after  man  was  ushered  in,  and 
cross-examined,  rather  too  pointedly  for  the  applicant's  com- 
fort ;  but  when  the  right  man  came  along,  it  did  not  take  long 
to  arrive  at  a  decision. 

THE  NEW  RECRUIT 

When  the  new  recruit  arrives  he  should  be  shown  around 
the  bank,  made  acquainted  with  the  men,  where  they  are, 
their  names,  and  his  general  duties.  He  should  be  told  cer- 
tain things  and  not  be  left  to  find  them  out  for  himself.  He 
should  have  the  rules  of  the  bank  explained  to  him,  and  be 
placed  in  charge  of  the  one  next  higher  up  for  coaching.  In 
New  York  there  is  a  little  book  which  gives  the  clearing- 
house numbers,  location  of  banks,  etc.,  all  of  which  he  will 
speedily  learn  as  he  begins  his  work.  Clerks  who  handle 
money  or  valuables  of  any  sort,  in  fact,  all  bank  men  are, 
as  a  rule,  bonded.  Personal  bonds  are  now  quite  rare,  the 
usual  surety  bond  being  common,  easy  to  get  and  affording 
no  embarrassment  to  anyone.  The  fee  is  usually  paid  by  the 
bank,  as  it  should  be. 

One  of  the  requisites  of  a  bank  clerk  is  that  he  be  a  good 
adder,  and  the  beginner  cannot  do  better  than  to  take  a 
few  lessons  in  adding.  Let  him,  as  he  gets  an  odd  moment, 
make  a  few  slips  of  figures  on  the  adding  machine,  and  add 
them  up,  turning  the  footings  under  until  he  has  finished. 
The  machine  will  correct  his  mistakes.  Let  the  list  be  made 


278 


THE   PRACTICAL  WORK   OF   A   BANK 


longer  and  longer,  until  it  assumes  considerable  length,  and 
he  will  soon  learn  the  fine  art  of  addition.  Let  him  also  prac- 
tice on  the  adding  machine  and  typewriter  as  occasion  war- 
rants, until  he  can  operate  both  with  ease.  Some  clerks  by 
reason  of  the  mechanical  adders  have  become  so  accustomed 


THE     ADDING     MACHINE    AND    IT8     WORK 
(Courtesy  of  the  Adder  Machine  Co.,  Wllkesbarre,  Fa.) 

to  machine  additions  that  after  being  in  a  bank  two  or  three 
years  are  still  unable  to  add  correctly  a  half-dozen  amounts. 
I  have  seen  a  clerk  leave  his  desk  and  take  as  much  time  in 
walking  to  a  machine  as  would  be  required  to  foot  the  few 
amounts  he  may  have  on  a  little  piece  of  paper.  Again,  I 
have  seen  a  bookkeeper  who  lacked  confidence  in  his  own 
mathematics,  with  a  ledger  propped  up  on  two  or  three 
stools,  footing  his  pages,  with  the  aid  of  an  adding  ma- 


BANK    ACCOUNTING  279 

chine.  And  the  chances  are  that  when  he  copies  the  foot- 
ings he  will  get  them  on  the  wrong  pages.  Of  course,  it  is 
against  the  rules,  but  I  suppose  the  poor  fellow's  brain  is 
so  fagged  with  its  unaccustomed  task  that  he  feels  he  must 
call  in  some  mechanical  aid.  I  have  heard  that  in  some 
banks  a  rule  is  in  force  that  no  clerk  shall  foot  less  than  a 
certain  number  of  items  on  a  machine.  But  I  don't  know 
who  watches  them  and  counts  the  items.  The  department 
heads  must  have  little  time  for  anything  else.6  Arithmetic, 
especially  interest  computations,  may  well  be  studied. 

Many  large  institutions  keep  a  record  of  all  employees, 
when  they  begin  work,  salary,  time  of  arrival  at  and  de- 
parture from  the  bank,  vacations,  sickness,  etc.,  as  a  check 
upon  the  man  himself  as  well  as  a  part  of  the  machinery 
of  the  bank.  Some  check  by  time  clock,  others  by  a  record 
kept  at  the  door,7  and  signed  by  the  employee,  and  some 
banks  keep  a  record  of  errors  made. 

THE  CHIEF  CLERK 

The  executive  head  of  the  accounting  force  is  the  chief 
clerk,  or  some  other  official,  who  does  the  same  work  under 
another  title,  sometimes  assistant  cashier,  who  is  charged 
with  the  duty  of  keeping  the  machinery  working  smoothly. 
He  endeavors  to  get  the  best  results  with  the  least  expendi- 
ture of  the  bank's  time  and  money,  remembering  that  cheap- 
ness is  not  always  conducive  to  economy  in  the  long  run. 
He  controls  the  records  of  the  bank.  He  not  only  sees  that 
they  are  properly  kept  but  properly  stored  and  made  avail- 
able for  reference.  Sometimes  the  hiring  of  the  force  is 
left  to  the  chief  clerk,  although  applicants  may  be  inter- 
viewed by  men  higher  up. 

A  good  man  quickly  distinguishes  himself.  He  stands 
out  by  the  quality  of  his  work.  It  is  so  in  school;  it  is  so 
in  life  and  in  business — we  can  pick  the  winners.  Bank 
clerks  are  but  men,  and  it  is  a  fine  art  to  select  the  apt  and 
the  quick  from  the  plodders;  the  ambitious  from  the  satis- 
fied, the  slothful,  the  indolent.  The  thing  to  do  is  to  get  the 
force,  which  may  be  a  mixture  of  all,  working  together 

«N.  D.  Ailing  before  New  York  Chapter,  A.  I.  B. 

*There  is  a  time-keeper  in  New  York,  who  knows  at  sight  each  of  the  five 
hundred  employees,  and  keeps  a  record  of  their  coming  and  going. 


280  THE   PRACTICAL   WORK   OF   A   BANK 

smoothly;  prevent  jealousies;  deal  out  justice;  pay  fairly; 
promote  wisely;  and  in  all  things  remember  that  the  Golden 
Rule  has  its  place  in  banking. 

The  chief  clerk  will  be  on  the  lookout  for  improved  sys- 
tems, short  and  better  methods,  aiming  to  keep  the  expenses 
of  the  bank  down  by  using  mechanical  appliances  wherever 
possible — doing  with  a  rubber  stamp  or  the  printing  press 
many  things  that  have  heretofore  been  done  by  hand. 

RUBBER  STAMPS 


It  is  amazing  and  amusing  to  discover  how  short-sighted 
many  in  authority  are.  In  a  certain  department  store  send- 
ing out  thousands  of  bills  monthly,  the  management  never 
thought  so  far  as  to  have  the  date  printed  on  enough  forms 
for  a  month's  use;  for  to  write  the  date  and  the  words  "To 
bill  rendered,"  five  thousand  times  must  have  taken  at  least 
one  day's  time  of  the  clerks  who  made  out  the  statements. 
It  is  in  the  little  things  that  time  and  energy  are  saved. 
The  motto  should  be:  "Never  do  by  hand  that  which  can  be 
done  better  by  machine;  and  never  attempt  to  do  by  ma- 
chine that  which  requires  a  head." 

It  is  well  to  distribute  the  work  so  that  there  will  be  an 
even  grind  and  not  spasmodic  rushes.  Men  do  good  work 
under  pressure,  but  they  should  not  be  rushed.  It  is  better 
to  have  an  even  pace  than  a  lull  and  a  rush,  a  rush  and  a 
lull,  for  the  tension  is  relaxed  and  it  is  difficult  to  speed  up. 
In  one  large  bank  there  are  two  busy  periods,  July  and 
January,  with  only  a  moderate  amount  of  work  in  between, 
because  the  management  could  not  devise  a  scheme  to  dis- 
tribute the  work  more  evenly.  For  six  weeks  in  the  year 
the  clerks  are  literally  worked  to  death;  while  in  the  other 
forty-six  they  are  just  comfortably  busy. 

In  large  banks  a  force,  sometimes  known  as  "floaters'" 
or  "the  flying  squadron,"  is  kept  available  to  be  pressed  into 
service  in  various  departments  at  different  times  in  the  day, 
in  order  to  have  a  large  force  where  the  volume  of  work  re- 
quires. Where  the  work  is  heaviest  the  reserves  are  placed 
to  strengthen  the  regular  employees  of  the  department. 

A  savings  bank  in  Brooklyn  makes  it  the  rule  to  keep 
its  men  busy;  not  too  busy,  but  occupied  all  the  time.  If  a 
clerk  remains  after  the  others  have  finished,  the  cause  is 


BANK    ACCOUNTING 


281 


inquired  into  and  if  he  is  overworked,  the  burden  is  dis- 
tributed. If  he  is  slow  he  is  coached ;  if  he  is  lazy  his  health 
is  inquired  into,  and  if  he  is  unfit  they  get  him  another  job. 
If  work  must  be  done  on  a  holiday  the  clerks  may  come, 
though  not  compelled  to,  and  get  a  generous  fee  for  sacri- 
ficing the  holiday — but  the  whole  force  shows  up.  But  this 
institution  is  one  of  the  few  conducted  on  a  broad  plane  of 
humanity,  with  an  exceedingly  fine  esprit  de  corps. 

THE  ART  OF  HANDLING  MEN 

It  is  a  fine  art — this  art  of  handling  men;  of  winning 
their  confidence.  When  your  force  works  because  they  like 
you,  and  not  because  they  are  afraid  of  you;  when  they  do 
as  good  work  while  the  schoolmaster  is  out  as  when  he  is  in; 
when  they  give  up  a  holiday  willingly  because  they  see  the 


CREDIT   CLERK-PROOF   SHEET 

For  191 


DI;BI 

rs 

Folio 

ACCOUNT 

CREDITS 

Debit  Clerk 

Loan  Department 

Collection  Department 

Coupon  Department 

Paying  Teller 

Receiving  Teller 

Trnst  Department 

Reorganization  Department 

Securities  Department 

Foreign  Department 

Transfer  Department 

Mail  Teller 

Total  Departmental  Balances 
Banks  and  Bankers  Ledger 

A—  B 

C-E 

G—  H-I 

F-J—  K—  L 

M—  O 

P-R 

S 

T—  Z« 

Suspended  Balance* 

PROOF    SHEET CREDIT    CLEHK 


282  THE    PRACTICAL   WORK   OF    A    BANK 

need,  and  do  it  for  your  sake — then  you  have  won  your  men, 
and  you  will  have  no  trouble  with  anarchy  in  the  ranks  or 
ink  spots  on  the  ledger. 

In  a  large  bank  it  seemed  needful  at  one  time  that  the 
force  be  corrected  for  a  few  things  that  were  occurring  that 
did  not  make  for  discipline.  The  officer — nearly  as  young 
as  the  youngest — called  them  together  and  said  a  few  kind 
words,  which  they  understood — and  obeyed  willingly,  be- 
cause they  understood  and  saw  the  logic  of  it  all;  and  as 
they  went  back  to  work,  one  by  one  they  thanked  him  for 
what  he  had  said,  but  most  of  all,  the  way  in  which  he  had 
said  it.  You  need  not  knock  a  man  down  to  make  him  see 
the  point — it  may  be  he  will  see  it  easier  if  you  lift  him  up! 

A  certain  other  bank  worked  on  the  principle  that  to  do 
anything  for  the  men  would  show  that  the  administration 
was  kind — which  wasn't  so.  When  a  rebuke  was  necessary, 
it  was  given  in  such  a  way  as  to  leave  a  sting.  When  ac- 
tual correction  was  needful  it  was  not  correction,  but  abuse. 
The  county  fair  was  a  yearly  occurrence.  It  was  the  big 
event  of  the  year.  The  bank  work  was  brisk  in  the  morn- 
ing and  slack  in  the  afternoon;  yet  for  ten  years  not  a  clerk 
in  the  bank  had  seen  the  fair.  The  manager  didn't 
think  it  necessary  that  they  should.  He  didn't  care  about 
it,  why  should  they?  But  when  a  new  officer  took  hold  and 
suggested  that  by  dividing  the  work  property  all  could  have 
an  afternoon — but  himself — it  was  found  that  no  one  was 
injured,  all  were  pleased,  and  nothing  happened.  It  was 
merely  a  bit  of  thoughtfulness. 

It  is  needless  to  say  that  errors  should  not  be  covered 
up.  Some  banks  will  not  allow  an  ink  eraser  in  the  place, 
requiring  all  errors  to  be  initialed  and  crossed  out,  while 
others  are  more  liberal ;  but  it  must  be  understood  that  errors 
must  be  reported,  and  if  the  rebuke  is  kind,  but  firm,  it 
will  have  its  effect.  Be  frank  with  your  men;  ask  them  to 
be  frank  with  you,  but  above  all  things  remember  that  to  be 
kind  costs  no  more  than  to  be  ugly  and  you  lose  more  than 
they  by  ill  treatment. 

It  may  be  necessary  in  some  banks  to  place  the  men 
under  a  time-clock  or  similar  check  as  to  their  going  and 
coming;  but  if  the  force  is  not  too  large  it  will  do  as  well  to 


BANK    ACCOUNTING  283 

put  the  men  on  their  honor.  All  men  have  that,  or  it  can  be 
developed,  and  it  is  better  to  work  on  this  than  to  place  too 
many  checks  on  the  moral  side  of  their  work. 

DAYS  OFF 

Some  men  will  take  advantage  of  a  bank's  goodness  in 
allowing  days  off,  and  while  a  day  off  is  not  to  be  despised, 
it  can  be  overdone.  Some  savings  banks  give  each  man  a 
day's  vacation  a  month,  so  that  there  is  no  excuse  for  ask- 
ing for  any  additional  time  unless  necessary.  Other  banks 
never  allow  any  days  off  except  the  regular  vacations.  A 
book  might  be  kept  or  a  card  record,  showing  the  days  off, 
and  the  reason.  Vacations  should  be  insisted  upon,  both  as 
a  matter  of  good  health  and  as  affording  an  opportunity  to 
check  the  work,  particularly  if  it  is  handling  money.  It 
gives  the  other  men  a  chance  to  learn  the  work,  and  is  a  de- 
sirable thing  all  'round,  except  in  those  banks  where  the 
force  is  so  small  and  overworked  that  it  means  temporary 
help,  which  is  always  more  or  less  unsatisfactory,  or  over- 
burdening those  who  remain  behind.  Some  banks  have  for- 
mal blanks  for  leave  of  absence,  and  these  when  filed  may 
be  used  as  the  basis  of  the  records  of  the  employees.  There 
must  be  a  system  in  a  large  bank  if  all  these  minute  details 
are  to  be  properly  recorded. 

PENSIONS  FOR  EMPLOYEES 

Some  banks  operate  a  pension  system  for  their  em- 
ployees. A  small  percentage  of  their  wages  is  withheld 
each  month,  going  to  the  credit  of  a  fund  in  the  name  of  the 
employee,  and  when  the  employee  leaves  the  service  of  the 
bank  before  the  age  of  retirement  for  any  cause  other  than 
disability  occasioned  by  illness,  the  amount  which  has  been 
contributed  by  him  to  the  fund  is  returned. 

Semi-annually  the  bank  contributes  to  the  fund  an 
amount  equal  to  or  in  excess  of  the  aggregate  of  the  con- 
tributions by  all  of  the  employees,  and  from  this  fund,  made 
up  of  voluntary  contributions  from  both  bank  and  em- 
ployees, a  percentage  of  his  average  wage  during  his  time 
of  service  is  paid  from  the  time  of  his  retirement  semi- 
monthly during  life. 


284  THE    PRACTICAL  WORK   OF   A   BANK 

PURPOSE  OF  THE  RECORDS 

The  bookkeeping  records  of  the  bank  culminate  and  find 
expression  in  the  statement  of  condition,  which  has  already 
been  analyzed.  The  "Statement  of  Condition"  must  be  dis- 
tinguished from  the  "general  ledger  statement"  which  it  re- 
sembles, and  from  which  it  is  made.  The  distinction  lies  in 
the  fact  that  in  the  statement  of  condition  the  nominal  ac- 
counts, such  as  expense,  interest,  rents,  etc.,  are  omitted, 
and  only  the  real  assets  and  liabilities  are  shown.  The 
statement  of  condition  goes  to  the  Comptroller  of  the  Cur- 
rency and  to  State  supervising  officials  and  is  published  in 
the  newspapers  in  condensed  form;  while  the  statement 
taken  from  the  general  ledger  daily  is  used  for  the  guidance 
of  the  bank's  officers,  as  well  as  to  test  the  balancing  of  the 
books.  The  purpose  of  the  records  is,  to  repeat  what  has 
been  said  at  the  beginning  of  the  chapter:  (1)  To  keep  a 
chronological  record  of  the  increase  or  decrease  of  the  assets 
of  the  bank;  from  whom  value  is  received  and  to  whom 
value  is  due;  (2)  the  profit  or  loss  that  attends  the  opera- 
tion of  the  bank;  and  (3)  the  financial  status.  If  we  had 
no  record  of  the  daily  events,  we  would  not  be  able  to  know 
the  state  of  or  the  avenues  of  the  indebtedness  as  it  exists; 
and  if  we  had  no  record  of  the  property  which  came  in  or 
the  property  which  went  out  of  the  bank,  we  could  not  know 
the  financial  position  or  status  at  a  given  time.  We  could 
not  keep  the  equilibrium. 

The  purpose  of  the  accounting  records  is,  therefore,  to 
keep  this  balance,  and  for  every  debit  there  must  be  a  credit 
somewhere.  If  the  depositor's  account  is  increased,  as  ex- 
pressing the  increased  liability  of  the  bank,  there  must  be 
an  asset  to  correspond.  The  reason  we  have  an  "over"  or  a 
"short"  is,  the  equilibrium  has  been  disturbed.  The  teller 
has,  for  instance,  increased  the  liability  of  the  bank,  say 
$100,  by  receipting  for  the  $100  in  the  depositor's  pass- 
book, and,  therefore,  set  up  a  liability  to  the  depositor  in 
that  sum.  He  has,  however,  on  the  other  side  but  $90  as  an 
asset  in  cash,  or  a  check  for  coJ lection,  or  some  other  item, 
and  the  equilibrium  is  out  of  true,  and  there  is  a  "shortage." 
He  can  only  right  the  balance  by  a  journal  entry,  which  sets 
up  a  nominal  account  in  place  of  the  missing  asset.  There- 
fore, he  makes  a  charge  to  "Overs  and  Shorts"  in  the  sum 


BANK    ACCOUNTING  285 

of  $10,  which  takes  the  place  of  the  $10  in  the  cash.  He 
might  charge  the  depositor  the  $10  and  thus  reduce  the  lia- 
bility of  the  bank;  but  he  cannot  do  this  without  warrant, 
and  so  must  proceed  on  the  first  mentioned  plan.  With 
this  brief  statement  of  the  fundamentals  of  accounting, 
which  every  bookkeeper  must  do,  if  not  understand,  we  are 
prepared  to  spend  a  little  time  in  the  bookkeeping  depart- 
ment to  see  how  these  records  are  kept;  not  going  into  de- 
tail too  closely,  but  working  on  general  principles,  for  in 
the  last  analysis  they  are  all  alike  in  principle  but  differ  in 
detail.  There  must  be  an  account  with  every  asset,  real  and 
nominal,  and  with  every  liability,  all  coming  together  in  the 
general  ledger,  and  finally  in  the  statement. 

THE  GENERAL  LEDGER 

The  general  ledger,  following  the  accounting  principle 
that  a  ledger  is  but  a  summation  of  the  other  records,  which 
it  controls,  holding  the  totals,  while  the  other  records  con- 
tain the  details,  must  have  an  account  for  every  class  of 
property,  every  class  of  instrument,  and  every  nominal  ac- 
count that  is  needed  to  record  the  work  of  the  bank.  As 
new  elements  arise,  new  accounts  are  opened.  If  the  bank 
had  no  banking-house  of  its  own,  there  would  be  no  "bank- 
ing house"  account.  If  it  received  no  rents,  there  would  be 
no  "rent"  account;  but  as  soon  as  it  bought  a  site  for  a 
banking-house,  there  would  be  raised  a  real  estate  account 
to  record  the  purchase.  If  it  rented  part  of  the  building,  it 
would  set  up  a  rent  account,  and  so  on,  the  ledger  build- 
ing itself  to  conform  to  the  changing  status  of  the  bank. 
This  record  is  preferably  kept  in  loose  leaf  form,  unless  the 
bank  officials  are  biased  against  this  method,  when  it  would 
be  a  bound  volume.  It  lasts  considerably  longer  than  other 
books  of  record,  and  may  be  properly  bound,  but  the  loose 
leaf  book  has  so  many  advantages,  such  as  dividing  the  book 
into  sections,  large  or  small  as  needs  require,  etc.,  that  the 
loose  leaf  form  is  highly  efficient  as  a  book  for  the  general 
records. 

CONTROLLING  ACCOUNTS 

It  would  be  possible,  of  course,  to  keep  all  accounts  di- 
rectly in  the  general  ledger,  even  those  with  depositors,  but 
this  would  be  such  an  overwhelming  task  that  it  has  been 


286  THE    PRACTICAL  WORK  OF   A   BANK 

found  necessary  to  take  the  accounts  one  by  one  out  of  the 
general  ledger,  as  the  work  became  too  voluminous  for  that 
book,  and  segregate  the  work  into  units,  carrying  the  totals 
only  to  the  ledger. 

And  so  as  one  class  of  accounts  become  numerous  they 
are  taken  out  of  this  record  and  placed  in  another  book. 
Accounts  with  banks  are  of  this  sort.  A  country  bank  hav- 
ing but  a  few  correspondents  could  easily  carry  them  in  the 
general  ledger;  while  a  city  bank,  whose  accounts  num- 
ber thousands,  would  divide  and  sub-divide  these  accounts, 
alphabetically,  or  geographically,  into  as  many  groups  as 
were  necessary. 

The  controlling  account  on  the  general  ledger  is  charged 
with  all  debits  made  to  these  accounts  and  credited  with  all 
credits,  so  that  the  sum  of  the  balances  on  the  one  will  equal 
the  balance  shown  on  the  other.  The  principle  of  the  con- 
trolling account  is  the  same  as  if  we  were  dealing  with  a 
person,  crediting  him  with  what  he  brings  and  charging  him 
with  what  he  takes.  If  we  deliver  to  a  ledger  fifty  items, 
we  charge  the  ledger  that  amount;  if  fifty  items  are  paid 
out  on  a  ledger  we  give  it  credit,  and  the  balance  is  the 
amount  due  from  that  ledger  to  the  accounting  system. 

The  accounts8  that  ordinarily  would  be  found  in  a  gen- 
eral ledger  are: 

ASSETS. 

Demand  loans  (classified  if  desired). 
Time  loans  (classified  if  desired). 
Discounts. 

United  States  Bonds  to  secure  circulation. 
United  States  Bonds  to  secure  United  States  Deposits. 
United  States  Bonds  on  hand. 
Bonds  and  Stocks  (total  or  in  detail). 
Banking  House  and  lot. 
Other  Real  Estate. 
Furniture  and  fixtures. 
Due  from  Federal  Reserve  Bank. 
Due  from  approved  reserve  agents. 

Due  from  other  banks  and  bankers,  savings  banks  and  trust  companies. 
Cash. 

Redemption  fund  with  the  U.  S.  Treasurer. 
Expense  account. 
Taxes. 

Rent  account  (if  bank  own  its  building). 
Salaries. 

Interest  accrued. 
Exchange  paid. 

Interest  paid  on  securities  bought,  etc. 
Premiums. 
Other  nominal  accounts. 

"See  p.  318h. 


BANK    ACCOUNTING 


287 


LIABILITIES. 
Capital. 
Surplus. 

Undivided  profits. 
National  Bank  Notes  Outstanding. 
Due  to  banks  and  bankers. 
Due  trust  companies  and  savings  banks  (generally  reported  separately  as  to 

savings  banks. 
Dividends  unpaid. 
Individual  deposits. 
Demand  certificates  of  deposit. 
Time  certificates  of  deposit. 
Certified  checks  outstanding. 
Cashier's  checks  outstanding. 
United  States  deposits. 
Interest  received  (income). 
Discount  received. 
Exchange  received. 
Other  nominal  liabilities. 

On  the  general  ledger  or  in  the  bond  ledger  there  would 
be  a  separate  account  for  each  bond  or  block  of  bonds 
bought;  each  piece  of  real  estate,  etc.  If  the  accounts  with 
other  banks  were  numerous  as  obtains  in  New  York  and 
other  reserve  cities,  these  would  be  taken  out  of  the  general 
ledger  and  kept  in  a  separate  book,  totals  only  being  carried 
to  the  general  ledger. 

JOUENAL  ENTEIES 

The  journal  is  used  to  record  the  items  day  by  day  that 
go  through  the  bank,  and  from  which  postings  are  carried  to 
the  general  ledger.  The  totals  from  the  discount  book,  in- 
dividual ledger  records,  etc.,  are  carried  to  the  journal  and 
from  thence  to  the  ledger.  The  ledger  is  not  a  book  of 


INDIVIDUAL    LEDGER 


288  THE    PRACTICAL  WORK  OF   A   BANK 

original  entry,  and  the  journal  is  used  as  in  all  bookkeeping 
methods  to  record  the  daily  events,  but  not  to  classify  them. 
Therefore,  we  run  the  journal  for  this  purpose.  If  real 
estate  were  bought,  bonds  bought  or  sold,  salaries  paid,  etc., 
it  would  be  a  proper  journal  entry.  Each  department  might 
run  its  own  journal,  or  the  totals  might  be  reported  to  the 
journal  clerk  for  entry  on  the  general  journal.  Thus,  if 
individual  deposits  as  ascertained  from  the  slips  and  from 
teller's  record  were  $10,000,  "individual  deposits'"  would  be 
credited  with  the  same  amount,  and  technically  cash  would 
be  charged.  But  since  all  records  are  of  cash,  the  charge  to 
cash  does  not  appear.  Likewise  checks  paid  are  charged  to 
individual  deposits  and  cash  technically  credited.  Items 
coming  in  from  other  banks  are  credited  to  them ;  items  sent 
them  are  charged.  Expenses  are  likewise  charged,  and  in- 
terest credited.  There  is  no  journalizing  as  journalizing  is 
commonly  known,  the  journal  being  a  cash  journal,  the  en- 
try on  one  side  or  the  other  operating  to  debit  or  credit 
cash.  Thus  we  do  not  say  "Cash  Dr.  to  Individual  De- 
posits," for  the  mere  entering  on  the  credit  side  operates  to 
charge  cash.  It  is  the  purpose  of  the  journal  to  assemble 
the  amounts  from  all  over  the  bank  and  aggregate  them  for 
posting  to  the  general  ledger. 

THE  ACCOUNTS  WITH  DEPOSITORS 

The  individual  ledger  bookkeeper  has  no  easy  task.  His 
work  is  a  grind.  In  some  banks  he  is  an  old  man,  in  others 
a  mere  boy;  but  whatever  the  age,  he  grinds,  and  grinds, 
and  grinds.  He  should,  first  of  all,  be  easy  with  the  pen, 
and  make  good  figures.  Good  figures  carefully  made  make 
good-looking  books,  but  in  the  haste  to  get  the  grind  over 
for  the  day  much  damage  has  been  done  to  the  looks  of  the 
books  and  ink  spots  follow. 

It  is  the  duty  of  the  individual  ledger  bookkeeper  to 
Keep  the  accounts  with  the  individual  depositors.  He  should 
not  write  up  pass-books,  this  balancing  being  done  in  large 
banks  by  statement  and  balancing  clerks,  who  make  the 
debit  entries  in  the  pass-book  or  on  the  statement  sheet  from 
the  vouchers,  as  a  check  upon  the  work.  These  accounts 
are  kept  in  the  main  by  the  Boston  Ledger,  an  old  idea,  but 
still  used  to  a  veiy  large  extent. 


BANK    ACCOUNTING  289 

THE  BOSTON  LEDGER 

Briefly  described  the  Boston  Ledger  is  a  large  book,  with 
the  names  of  depositors,  as  a  rule,  printed  down  the  left- 
hand  margin,  or  left  and  right  both,  or  center,  allowing 
space  for  new  accounts.  Running  across  the  page  there  are 
a  number  of  spaces,  one  for  each  day,  with  a  column  for  the 
deposits,  checks  and  balance.  Some  have  a  column  for  the 
items  in  detail  and  a  column  for  the  total,  so  that  one  sub- 
traction only  is  necessary.  The  total  of  the  deposits  must 
equal  the  total  received  by  the  teller  and  charged  to  the 
bookkeeping  department,  and  the  total  checks  must  equal 
the  total  checks  charged  likewise  by  the  paying  teller.  Over- 
drafts are  carried  in  red  in  the  balance  column,  and  so  are 
not  footed.  Each  page  may  be  proven  by  itself. 

The  old  Boston  Ledger  is  a  long-time  favorite  and  has 
many  devotees.  The  names  are  usually  printed  in  alphabet- 
ical arrangement,  spaces  being  left  for  new  accounts  in  their 
proper  place.  The  author  has  found  that  a  scheme  of 
bookkeeping  can  better  be  understood  by  a  study  of  the 
form  than  by  an  attempt  to  describe  it,  and  the  reader  is, 
therefore,  referred  to  forms  shown  herewith  for  ideas  as  to  the 
work  of  the  Boston  Ledger.  It  has  been  in  use  so  long  and 
in  so  many  banks  that  it  has  become  part  of  the  banking 
machinery  of  the  country  and  recognized  everywhere  as  a 
labor  saver. 

The  work  of  an  individual  bookkeeper  consists  largely 
of  adding  credits  to  and  subtracting  the  debits  from  the  old 
balance.  The  deposits  are  posted  separately,  but  it  is  com- 
mon practice  to  post  the  checks  in  total,  several  checks  con- 
stituting one  charge.  Before  the  items  are  entered  on  the 
ledger  it  is  customary  to  run  them  off  on  an  adding  ma- 
chine or  on  a  "scratcher,"  so  that  the  total  debits  and  credits 
to  that  ledger  may  be  known  to  effect  the  proof.  Items 
other  than  regular  deposits  and  checks  are  designated  by 
the  letters  "N"  for  note;  "D"  for  discount,  and  "C"  for 
collection. 

Some  banks  have  a  column  to  which  are  posted  the 
clearing-house  items,  the  total  of  this  column  equaling  the 
total  clearings  received.  Some  banks  list  these  items  in  a 
journal,  using  the  adding  machine,  and  write  the  name  of 
the  maker  in  between  the  figures,  as  a  skeleton  proof  of 


k> 


13 


290 


BANK    ACCOUNTING  2dl 

the  clearings.  If  this  is  divided  according  to  ledgers,  of 
course  the  amount  that  goes  on  the  ledger  must  be  the  same 
as  the  machine  list. 

Where  the  pass-book  is  balanced  a  mark  is  made  oppo- 
site the  date  to  indicate  that  up  to  that  point  the  vouchers 
have  been  returned  and  the  book  balanced.  It  is  well  to 
use  the  abbreviation  "Bal."  in  red  to  indicate  the  fact. 

MERITS  OF  THE  BOSTON  LEDGER 

The  advantages  of  the  Boston  Ledger  are  the  quickness 
of  posting  and  the  daily  proof,  it  being  ideal  in  this  respect. 
Of  course,  it  does  not  show  the  depositor's  record  over  a 
length  of  time,  usually  not  longer  than  six  months,  but  this 
information  can  be  kept  on  the  average  book. 

The  disadvantage  of  the  Boston  Ledger  is  the  fact  that 
unless  much  space  is  given  to  active  accounts  the  details  of 
the  checks  cannot  be  crowded  in.  Where  a  firm  is  known 
to  have  a  large  number  of  items,  the  account  can  be  carried 
at  the  back,  on  a  page  ruled  for  that  purpose.  Or,  the 
checks  might  be  added  by  machine,  the  slip  attached  and 
the  total  listed  as  one  item,  as,  for  instance,  "7 — $175.63," 
means  that  seven  checks  total  $175.63,  and  are  posted  as 
one,  and  will  be  found  pinned  together  in  the  files.  By  this 
arrangement  a  great  many  checks  may  be  entered  with  a 
few  charges. 

Postings  are  made  directly  from  the  tickets  and  checks, 
and  the  total  of  the  credits  must  equal  the  total  received  by 
the  receiving  teller,  and  the  total  of  the  debits  the  total  of 
the  checks  turned  in  by  the  paying  teller.  It  is,  there- 
fore, easy  to  locate  an  error.  Each  page  may  be  bal- 
anced by  itself,  still  further  running  the  error  down 
to  a  single  page.  Some  banks  enter  the  different  transac- 
tions in  colored  inks;  as,  for  instance,  the  clearing-house 
debits  in  green;  checks  paid  over  the  counter  in  black;  bal- 
ances in  red,  etc.,  the  intent  being  to  designate  the  class  to 
which  the  item  belongs. 

There  are  many  modifications  of  the  Boston  Ledger,  all 
based  on  the  original  idea — that  of  reducing  the  work  to  the 
minimum,  making  the  postings  quickly,  and  with  ready 
proof.  A  bank  contemplating  a  change  in  its  methods 


CO 

S  g 

i-l      D 

-9 

DO 


o  ». 

o  i 

o 


h  - 


« 

" 

c 
"rt 

n 

«^ 

IQ 

u.s 

J 

rt-g 
H 

u 

g 

O 

a. 

Q 

1 

u 

c 
"a 

en 

p 

J5 

n 

ca 
8 

o 

< 

U-S 

w 
& 
p 

i 

O 

< 

« 

2  "o 

§ 

U 

i^ 

n 

X 

o 

i 

a 

-2 

I 

03 

V 

NAMES 

292 


BANK  ACCOUNTING 


293 


should  investigate  the  different  forms  for  itself,  and  decide 
upon  the  one  best  suited  to  its  needs. 

THE  SKELETON  PROOF 

As  a  check  upon  the  work  of  the  individual  ledger  book- 
keeper a  skeleton  ledger  is  often  kept  in  loose  leaf  form, 
additions  and  deductions  being  made  one  day  late.  Thus 
all  entries  are  made  at  one  time  and  if  the  skeleton  ledger  is 
used  as  a  statement  system,  the  sheet  goes  to  the  depositor 
as  a  statement  at  the  end  of  the  month,  the  balance  of  which 
must  agree  with  the  ledger  balance.  It  stands  to  reason  that 
if  the  same  computations  are  made  independently  of  each 
other  and  from  the  same  original  sources  the  results  must 
agree;  and  not  only  the  results  but  the  items  must  be  classi- 
fied the  same  or  discrepancy  will  result. 

In  making  charges  to  the  ledger  the  clerk  must  be  on 
the  watch  for:  Overdrafts;  stop  payments;  forgeries;  raised 
checks;  post-dated  checks;  stale  checks;  payment  against 
uncollected  funds ;  alterations  in  the  check ;  figures  and  writ- 
ing being  different;  signatures;  indorsements;  voucher 
checks  to  be  properly  receipted;  checks  of  deceased  persons; 
protested  checks  with  fees  accompanying;  impression  of 


STATEMENT 


1>i  E  NATIONAL  EXCHANGE  BANK 

or  ROANOKE,  VIRGINIA 


FORM    USED   IN    STATEMENT  SYSTEM 


294 


THE    PRACTICAL  WORK  OF   A   BANK 


In  Account  with 

Manchester  National  Bank 

of  New  York. 
For  Month  of 


CREDITS 


Ol> 

Oetcrlptlon 

Amount 

DM 

Description 

•  mount 

tALANCE 

TOTAL  CREDITS 

TOTAL  CHARGES  DEDUCTED 

BALANCE 

Please  examine  the  account,   as  this  statement   will  be  considered 
correct  unless  we  are  notified  to  the  contrary  within  one  month. 
Please  notify  of  any  permanent  change  in  address. 


ACCOUNT  STATED 


BANK    ACCOUNTING  200 

protecting  devices  must  agree  with  figures;  signatures  to 
checks  under  power  of  attorney;  transfer  of  funds  of  cor- 
poration by  officer  to  individual  account;  certified  checks; 
notes  that  are  to  be  charged  to  customer's  account  must  be 
due;  "no  account" — careful  search  being  made  before  re- 
turning the  item  as  unpaid. 

The  bookkeepers  in  large  cities  are  often  mere  boys,  and 
generally  not  mature  men,  and,  therefore,  need  attention 
and  coaching.  They  must  be  warned  to  look  out  for  sus- 
picious points  about  a  check.  They  must  be  on  guard  to 
catch  forgeries.  They  must  post  the  right  amount  to  the 
right  account,  and  not  get  names  confused. 

There  is  a  great  difference  in  bookkeepers  in  this  regard. 
Some  will  post  anything  as  long  as  it  resembles  or  reads  like 
the  man's  name.  In  fact,  the  color  of  the  check  is  enough 
sometimes,  while  another  will  detect  a  discrepancy  in  a  signa- 
ture in  an  instant.  This  idea  of  instructions  might  be  ap- 
plied to  all  of  the  other  departments,  but  I  have  particularly 
mentioned  bookkeepers  as  they  are  apt  to  be  younger  as  a 
class,  because  it  is  the  first  responsible  position  that  a  clerk 
usually  is  given.8 

THE  AVERAGE  BOOK 

It  is  customary  to  keep  a  record  of  all  depositors,  par- 
ticularly with  reference  to  their  average  balance.  This  is 
done  on  a  card,  properly  ruled,  showing  the  actual  or  aver- 
age balance  at  certain  periods.  By  the  use  of  the  balance 
ledger  it  is  an  easy  matter  to  obtain  this  information,  the 
balance  for  each  day  being  listed  on  an  adding  machine 
and  divided  by  the  number  of  days.  Some  banks  loan  ac- 
cording to  the  average  balance  and  it  is  important  to  know 
what  the  average  balance  is.  This  may  be  the  average  daily 
balance,  or  the  average  monthly  balance,  preferably  the  aver- 
age daily  balance,  as  it  more  accurately  portrays  the  actual 
condition  of  the  account.  The  average  monthly  balance  is 
obtained  by  dividing  the  average  daily  balance  for  the  twelve 
months  by  twelve.  The  average  amount  of  discounts  is 
also  sometimes  kept,  in  order  to  ascertain  the  proportion  of 
loans  to  deposits;  but  the  customer's  liability  to  the  bank, 
direct  and  contingent,  is  often  kept  by  the  liability  ledger, 

•N.  D.  Ailing  before  New  York  Chapter. 


296  THE    PRACTICAL  WORK  OP   A   BANK 

which  shows  the  amount  of  the  customer's  direct  indebted- 
ness and  the  amount  for  which  he  is  secondarily  liable  on 
discounts. 

RENDERING  ACCOUNTS  STATED 

The  old  method  of  rendering  an  account  stated  with  the 
depositor  of  a  bank  was  to  balance  his  pass-book,  return  his 
vouchers,  and  if  no  complaint  was  made,  to  consider  the 
balance  as  correct.  This  still  obtains  in  many  places,  the 
returned  vouchers  being  listed  on  an  adding  machine  and 
only  the  total  carried  into  the  book  "as  per  list."  But  nu- 
merous cases  of  forgery  having  gone  through  the  courts 
where  depositors  have  made  claims  against  the  bank  for 
forgeries  that  occurred  a  considerable  length  of  time  before 
complaint  was  made,  legislation  has  now  in  many  cases 
made  it  obligatory  upon  the  depositor  to  make  claim  for 
forged  checks  within  a  certain  length  of  time  after  receiving 
his  balanced  account  stated  or  be  estopped  to  claim  the  ben- 
efit of  the  law  of  forged  instruments.  Banks,  as  a  rule,  now 
require  the  statement  to  be  acknowledged,  and  vouchers  re- 
ceipted for  as  a  record  that  the  account  is  in  agreement  with 
the  customer's  account  and  the  vouchers  have  been  exam- 
ined. *;*r^ 

It  is  but  fair  that  the  bank  be  put  on  guard  if  any  ir- 
regularities exist  in  the  relations  with  the  customer,  and 
the  verification  of  vouchers  and  acknowledgment  of  the  cor- 
rectness of  the  account  are  of  utmost  importance  to  both.  If 
irregularities  exist  they  will  the  sooner  be  detected  if  prompt 
and  authentic  verification  obtains;  and  as  a  matter  of  good 
business  and  good  banking  eveiy  concern  should  have  prop- 
er reconcilement  made  with  its  bank  periodically.  It  should 
be  done  by  one  other  than  the  regular  clerk  or  officer  who 
draws  the  checks  and  handles  the  cash.* 

THE  STATEMENT  SYSTEM 

The  statement  system  is  a  sort  of  duplicate  ledger,  kept 
as  a  check  upon  the  work  of  the  individual  bookkeepers  and 
as  a  record  to  send  to  the  depositor  at  the  close  of  the 
month;  for  statements  are  rendered,  as  a  rule,  monthly  in 
this  scheme.  Moreover,  it  keeps  the  vouchers  from  accu- 
mulating, some  concerns  under  the  old  method  sending  in 

*In  New  York  the  law  provides  that  any  claim  against  the  bank  for  forgery 
or  alteration  must  be  made  within  one  year  after  the  return  of  the  voucher. 


BANK    ACCOUNTING 


297 


their  pass-book  only  at  long  intervals  and  then  only  when 
requested.  The  writer  knows  of  a  lawyer  who  drew  hun- 
dreds of  checks  and  had  not  reconciled  his  pass-book  with 
the  bank  for  three  years. 

The  statement  system  has  many  points  of  advantage. 
First,  it  checks  the  postings;  second,  it  checks  the  balances; 
and  third,  it  eliminates  the  writing  up  of  the  pass-book. 


Guaranty  Trust  Company  of  New  York 


B  **  Guaranty  Trust  Company  or  New  York 


STATEMENT   USED    IN    THE    STATEMENT   SYSTEM    IN    PLACE    OF    BALANCING    PASS-BOOK 


When  the  bookkeeper  has  made  his  postings,  the  tickets 
and  checks  are  sent  to  the  statement  clerk  who  enters  the 
items  on  his  sheet  in  detail  or  in  total  as  may  be  decided 
upon,  .and  strikes  the  balance,  extending  the  same  to  a  per- 
forated stub  at  the  side.  At  the  close  of  the  day  the  bal- 
ances are  called  back,  and  must  agree.  If  error  has  oc- 
curred in  posting  to  wrong  account,  or  a  check  omitted,  it 
will  here  be  detected.  At  the  close  of  the  month  the  vouch- 
ers are  checked  back  with  the  statements,  and  a  balance 
struck,  and  the  sheet  with  vouchers  sent  to  the  depositor  for 


In  Account  with 

Jrwittg   Nattnnal 


NEW   YORK. 

Pre 

Tob 

nous  balance  and  ere 

llof  :  -I 

dits  Ii*ted  below 

'ebits  as  per  machin 
alanre  forward 

Tor  i»  reported  within  ten 

$__ 
.  list 

R 

Please  .examine  at  once.    If  no  ei 

day*  the  account  will  be  considered  correct 

DUDJ.'c±i                        CREDITS  ONLY 

F.X.-Foreign  Exchange 

Date 

Item 

Amount 

Date 

Item 

Amount 

Balance 

Please  call  for  your  statement  on  the  SECOND  BUSINESS  DAY  OF  EACH  MONTH  and 
1«  preserve  it  carefully  uiing  PASS  BOOK  as  Receipt  for  Deposits. 


STATEMENT    RENDERED    TO    DEPOSITORS 


BANK    ACCOUNTING 


299 


his  guidance,  the  stub  remaining  in  the  bank.  Balances  are, 
of  course,  carried  over  to  a  new  sheet  for  each  depositor  as 
the  basis  for  the  next  month's  work.  The  addressing  ma- 
chine is  coming  into  play  here  as  a  ready  means  of  listing 


ADDRESSING   MACHINE   AND   ITS    WORK     ( BELOW ) 

(Courtesy  of  the  Addressograph  Co.,   Chicago,  111.) 

the  headings  for  these  accounts.  It  is  a  quick  and  most 
excellent  method  of  keeping  the  accounts  with  depositors.  A 
slip  is  enclosed,  asking  the  depositor  to  report  promptly  the 
receipt  of  vouchers  and  to  verify  the  balance. 


V.J 

ANDERSON     &     CRAWFORD, 
1921     BROADWAY, 
NEW     YORK.N.Y. 

(' 

v  Business  Catalogues 

^ 

1  Rating.... 

1 

i 
Customer.  4          \                                               C 

__v;/                   1__^—            v  "'•"(     1:>^"^_ 

•i| 

-                          ••':'".                      .     ~  -':-    ~        •—     •:•:..  .  •• 
3  £Ui©^I^A.SI^     &  •  'lilQr£3$mGC$isfk'- 

,T05T,»C)T  mtt 

*      -•    '.  .'"    •                            ;         ••••,.•••'  ••-.  •••'               :  •           •            '•'"':  ,.,:    1 

1 

800  THE    PRACTICAL  WORK  OF   A   BANK 

OPENING  A  NEW  LEDGER 

Comparatively  a  few  years  ago  the  only  system  of 
keeping  the  individual  accounts  in  hanks  was  the  old 
three-column  balance  ledger  and  the  "Boston"  ledger.  Both 
of  these  ledgers  were  permanently  bound  volumes,  and 
when  one  was  filled  up  it  was  necessary  to  open  a  new  book 
and  transfer  all  the  names  and  balances  from  the  old  ledger. 

Within  recent  years,  however,  there  has  been  almost  a 
transformation  in  bank  bookkeeping.  Improved  methods 
have  been  introduced.  One  of  the  most  important 
is  the  loose-leaf  system  of  keeping  the  individual  ledger. 
The  greatest  value  of  the  loose-leaf  ledger  lies  in  the  fact 
that  it  eliminates  the  necessity  of  opening  new  ledgers  and 
transferring  accounts.  There  are  also  other  advantages 
which  it  possesses.  In  spite  of  these  facts,  however,  there 
are  still  many  banks  that  cling  to  the  old  bound  ledgers. 

The  opening  of  the  individual  ledger  in  a  bank  is  a  diffi- 
cult task.  The  individual  bookkeeper's  time  in  the  aver- 
age bank  is  usually  fully  taken  up  with  the  daily  routine  of 
posting  and  proving  his  ledger,  and  although  the  opening 
of  a  ledger  requires  hours  of  extra  work,  it  must  not  inter- 
fere with  his  regular  daily  transactions.  This  is  possible 
only  by  putting  in  a  great  deal  of  time  after  the  usual  bank- 
ing hours.  Some  bookkeepers  have  been  known  to  work  all 
night  in  order  to  get  all  the  balances  transferred  from  one 


A 

E 

I 

0 

U 

Y 

Totals 

A  

60 

100 

55 

40 

25 

10 

290 

B  

110 

140 

96 

103 

80 

30 

559 

C  

79 

93 

52 

60 

24 

11 

319 

Total  No. 
of  pages 
for  accte. 

2.49 

333 

203 

203 

129 

51 

1168 

BANK    ACCOUNTING  801 

ledger  to  another.  Because  it  is  such  a  tremendous  task, 
they  are  apt  to  put  it  off  as  long  as  possible.  When  they 
do  so  the  accounts  soon  begin  to  "overlap,"  and  when  they 
are  thus  confused,  posting  is  slower  and  less  accurate. 

Some  banks  that  use  the  bound  ledger  purchase  books 
only  of  ordinary  size  and  have  a  custom  of  opening  new 
ledgers  at  certain  regular  periods,  usually  January  first  of 
each  year.  Even  though  the  old  ledger  is  not  filled  a  new 
book  is  opened  at  these  stated  periods.  It  is  advisable,  how- 
ever, to  use  ledgers  as  large  and  thick  as  possible,  and  yet 
capable  of  being  properly  handled.  The  longer  the  book 
can  be  made  to  last  the  better  it  is.  It  not  only  defers  the 
arduous  labor  of  opening  a  new  ledger,  but  it  is  more  con- 
venient for  reference,  etc.,  as  it  keeps  the  accounts  under  one 
cover  extending  over  longer  periods. 

When  an  individual  ledger  is  to  be  opened  the  first 
thing  to  be  done  is  the  "spacing"  of  the  new  ledger.  In 
order  to  properly  space  the  ledger  the  bookkeeper  must  ap- 
proximate the  number  of  pages  that  are  to  be  assigned  to 
each  account  from  the  old  ledger.  To  do  this  he  must  go 
over  the  accounts  carefully  in  the  old  ledger  and  determine 
how  much  space  each  has  used  within  a  given  time. 

Some  bookkeepers  simply  begin  by  copying  the  names 
from  the  old  ledger  approximating  the  amount  of  space  to 
be  given  to  each  as  they  go  along,  and  following  the  order 
of  the  accounts  in  that  ledger.  This,  however,  is  a  poor 
method,  as  the  accounts  in  the  new  ledger  in  nine  cases  out 
of  ten  should  not  follow  in  the  same  order  as  those  in  the 
old  ledger.  The  chances  are  that  some  accounts  have  over- 
lapped and  many  have  been  crowded  into  spaces  in  which 
they  do  not  logically  belong.  The  pages  cannot  be  appor- 
tioned with  any  degree  of  accuracy  at  all  when  this  scheme 
is  used. 

Of  course,  in  spacing  a  ledger  and  entering  the  names 
of  the  depositors,  the  balances  are  not  forwarded  at  the 
same  time.  The  spacing  is  accomplished  and  all  the  names 
are  entered  before  any  of  the  balances  are  transferred.  The 
bookkeeper  does  not  attempt  to  space  his  ledger  and  for- 
ward all  the  names  in  one  day.  In  fact,  most  of  them  be- 
gin about  a  month  before  the  date  set  for  forwarding  the 
balances  to  apportion  the  pages  arid  copy  the  accounts. 

Another  method  used  is  to  write  the  names  of  depositors 


80*  THE    PRACTICAL   WORK   OF   A   BANK 

on  slips  of  paper,  with  the  number  of  pages  to  be  allotted 
to  each  account,  and  insert  each  slip  in  the  ledger  at  the 
page  the  account  is  to  occupy.  This  method,  though  not 
entirely  satisfactory,  is  much  better  than  the  first.  If  the 
spacing  does  not  work  out  right  under  certain  letters  of  the 
alphabet,  the  slips  may  be  easily  removed  and  replaced  to 
readjust  the  apportionment.  After  the  slips  are  all  insert- 
ed, the  names  are  copied  in  the  book  from  them.  The  loca- 


ADDINO    MACHINE    AS    USED   FOR    BANK   STATEMENTS SPECIMEN    OF    WORK   P.    SOS 

(Courtesy  of  the  Adder  Machine  Co.,  Wilkesbarre,  Fa.) 

tion  of  each  following  account  is  determined  by  the  location 
of  the  slip  in  the  ledger  and  the  number  of  pages  indicated 
on  the  slip. 

MAKING  ALLOWANCES  FOR  NEW  ACCOUNTS 

In  spacing  a  new  ledger,  allowance  must  of  course  be 
made  for  new  accounts  which  are  likely  to  be  opened  during 
the  life  of  the  ledger.  This  space  should  be  apportioned  as 
accurately  as  possible,  as  a  failure  to  do  so  is  sure  to  cause 
the  overlapping  of  the  accounts.  For  instance,  suppose  the 
space  apportioned  to  the  vowel  "i"  under  A  has  been  filled 
with  new  accounts  and  a  man  by  the  name  of  Aikens  opens 
an  account.  This  account  will  then  have  to  be  entered  under 
some  other  vowel  in  the  space  probably  already  apportioned 
to  some  other  account.  This  account  will  consequently  run 


BANK    ACCOUNTING 


303 


into  the  account  which  has  been  crowded  into  the  space 
which  did  not  belong  to  it. 

To  secure  accuracy  in  the  spacing  of  a  new  ledger  it  is 
necessary  to  divide  and  sub-divide  the  ledger;  that  is,  so 
many  pages  are  first  to  be  apportioned  to  each  letter  of  the 
alphabet  and  each  letter  is  sub-divided  into  vowels,  so  many 
pages  being  given  to  each  vowel.  Of  course,  all  ledgers 
should  have  the  vowel  index,  as  with  it  the  accounts  can  be 
located  with  greater  ease  and  dispatch.  The  index  is  usual- 
ly bound  in  a  separate  cover  from  the  ledger,  as  an  index  in 
a  large,  cumbersome  ledger  would  be  rather  inconvenient 
for  reference. 


Mc.S»Uj  B«y.«  t  D.»l«  ,„  ACCOUNT  WIT* 

» UNITED  STATES  NATIONAL  BANK 

in  OHAIIA.XKII.    June   111 


1  "1° 

1      c 

111 

4? 

400 

00 

J2 

.....cc 

1 

500 

00 

un 

fnn 

M\?n 

1 

fi7 

2 

2 

50 

3i 

Jfl 

•^ 

om 

QO 

16 

70 

710   00 

I    : 

91 

91 

75 

71! 

1] 

40 

1 

50 

75 

71  n 

00 

-       1 

160.75 

a 

114 

S 

00 

4<f 

"0 

100 

f_ 

?° 

4 

V? 

?<; 

39  i)6|       3  1«|8j 

- 

"TTH" 

~nt 

11« 

7h 

123 

45 

t 

Tn~ 

"on~ 

•Jrvr" 

nr 

j 

*/'  -"• 

125    71 

{ 

41 

43 

K3 

11 

4 

no 

9 

ion 

no 

?r 

2 

i 

-ft 

no" 

5i 

M 

14 

41 

1? 

4_ 

•iO 

•>n 

10 

2 

717 

nno 

7S 

nn 

i 

?J 

_J 

f?t  ^R 

i 
i 

10 

nr 

Q 

4 

•i* 
9? 

1 

nn 

u 

2 

OfK> 

no 

: 

1CR 
.  g 

^ 

0.3. 

JQ9_41 

.1 

7 

70 

1? 

a 

200 

00 

11 

1 

•inn 

on 

709 

•*•  i 

^ 

70 

00 

45 

74 

10 

00 

16 

TO 

00 

4?? 

SB 

071   03 

i 

'? 

Or 

2^4 

9* 

65 

00 

03 
43 

8 

561  43 

i 

fl 

71 

41 

00 

125 

no 

19 

5 

no<i 

00 

(BJ 

J90-51 
\fc% 

?rn 

Of 

7rt 

_fio_ 

% 

70 

•uq 

H 

ffi 

i 

100 

00 

3?  3* 

21 

350  66 

• 

i 

zoo 

00 

50,00 

. 

_Z5-,42j 

• 

400   00 

320 

69 
16 

oe 

M 

O.C.    B20    16 

1  I  6  38  08 
i   099.0; 
3S3  °" 

-' 

la'7?' 

if 

HI 

on 

ii 

6*8 

2 

s 

7^ 

60  oo 

sz 

g 

099 

1 

400 

00 

309  JS3 

^ 

3  235 

40 

§ 

g 

oe 

3|ffilfe 

Z3 

Jj 

jfi 

«7 

so 

29 

650 

75 

§ 

\ 

1*7 

74 

!    4 

075   04 

1    "'' 

uj 

U 

00 

Uu 

DO. 

n 

—  •* 

a" 

U4 

1    J 

-7^5-  fl* 

_L_$ 

000 

on 

Ual 

17 

in 

s 

ift 

•" 

•7K 

00 

*3A 

ef 

5 

' 

If 

31 

-505  U- 

i  

1 

s 

JH 

^c 

^  3 

56  54 

35 

K 

(^3 

1    CQ 

1?1 

pc; 

50  oo 

JL 

9*7 

4S 

B 

41 

J 

SOB 

a 

21 

41 

40 

^7 

i 

A45   7a. 

}l 

9 

^4 

98  56 

43 

*<  ^7 

14!_7i 

44 

45 

4« 

167 

• 

14   87 

*?~ 

110 

70 

J49_  86 

4!l 

-*f 

on 

ij 

76 

50 

7S 

500 

nn 

•mm 

3  775  0* 

20 


STATEMENT    RENDERED   DEPOSITORS    MONTHLY 


(Court**?  of  th»  Adder  Machine  Co..  Wllkeabarre,  Pa.> 


304  THE    PRACTICAL   WORK   OF    A    BANK 

One  method  used  by  some  banks,  which  will  probably 
secure  the  most  accurate  spacing  of  the  ledger  is  that  out- 
lined by  Mr.  Patten  in  his  work  on  "Practical  Banking," 
as  follows: 

"We  should  now  take  the  old  ledger  and  ascertain  the 
length  of  time  it  has  been  used  and  estimate  the  number  of 
pages  each  account  will  require  in  the  new  ledger,  noting 
same  in  pencil  in  front  of  the  name  in  the  index.  After 
this  process  has  been  completed,  add  the  number  of  pages 
allowed  for  the  accounts  in  each  vowel,  then  prepare  a  dia- 
gram like  Figure  1,  which  is  prepared  on  a  basis  of  an  A 
to  C,  1,500-page,  ledger,  and  enter  the  number  of  pages 
allowed  for  each  vowel. 

"On  the  diagram  shown  there  is  a  total  of  290  accounts 
in  'A'  divided  among  the  vowels;  'B,'  559;  'C,'  319;  making 
a  total  of  1,168  open  accounts.  The  footing  of  the  accounts 
is  proven  by  both  vertical  and  horizontal  addition  of  totals, 
which  should  always  be  done,  or  one  may  be  thrown  out  on 
the  general  result.  Deduct  the  whole  number  of  pages  al- 
lowed to  the  accounts  on  the  index  from  the  total  number  of 
pages  in  the  ledger,  and  you  ascertain  the  number  of  pages 
to  be  dstributed  among  the  vowels. 

"In  the  illustration  there  are  332  extra  pages  (1,500 
minus  1,168  equals  332) ;  therefore  that  number  of  pages  is 
to  be  divided  equally  among  the  vowels.  To  find  the  num- 
ber of  pages  to  be  allotted  after  each  vowel,  divide  decimally 
the  total  of  the  extra  pages  allowed  for  the  accounts,  as 
follows:  332  divided  by  1,168  equals  .2842.  Now  multiply 
this  quotient  by  the  total  number  of  pages  allowed  for  each 
vowel,  and  the  result,  as  per  Figure  2,  gives  the  number  of 
pages  to  each  vowel.  These  totals  are  also  proved  horizon- 
tally and  vertically,  which  is  of  importance.  Of  course,  in 
figuring  decimally,  one  may  be  obliged  on  account  of  frac- 
tions to  allot  a  few  extra  pages  to  the  larger  vowels  to 
make  the  scheme  prove,  deducting  them  from  another  vowel. 

"After  you  have  carefully  schemed  out  the  number  of 
pages,  as  in  Form  2,  add  the  total  allowed  in  your  estimate 
to  the  total  of  extra  pages  for  'A,'  and  the  result  gives  you 
the  page  on  which  that  letter  should  end,  in  this  case  page 
373.  Letter  'B'  should  commence  on  the  following  page 
and  end  on  page  1091.  'C'  should  commence  on  page  1092 
and  continue  to  the  end  of  the  ledger.  After  this  has  been 


BANK    ACCOUNTING 


305 


A 

E 

I 

0 

U 

T 

Totals 

A  

17 

28 

16 

•12 

7 

AT 

oo 

B  

51 

40 

27 

29 

21? 

9 

1^9 

0  

22 

26 

15 

17 

7 

3 

90 

Total  No. 
of  extra 
pages.. 

70 

94 

58 

58 

37 

15 

332 

FIGURE  2. 

done  enter  in  ink  opposite  each  name  in  the  index  the  num- 
ber of  the  page  on  which  the  account  is  to  commence,  keep- 
ing a  tally  by  adding  to  the  page. number  the  number  of 
pages  allowed  for  the  account  in  question  as  per  your  pencil 
memoranda.  Proceed  carefully  through  the  index,  proving 
each  vowel  by  adding  the  total  allowed  for  that  vowel  to  the 
previous  footing,  thus: 

Total  number  of  pages  allowed  for  "Aa,"  as  per  scheme 60 

(Last  "Aa"  should  be  entered  on  page  60.) 
Extra  pages  allowed  for  "Aa" - 17 


(Therefore  the  first  "Ae"  should  be  on  page  78.) 

Total  number  of  pages  allowed  for  "Ae" , 

(Last  "Ae"  should  be  entered  on  page  177.) 
Extra  pages  allowed  for  "Ae" 


(Consequently  the  first  "Ai"  should  be  on  page  206.) 


V 
100 

28 
205 


"And  thus  proceed  through  the  entire  index.  Any  dif- 
ferences should  be  corrected,  and  each  letter  should  end  on 
the  page  previously  determined  upon." 

A  chart  very  similar  to  the  one  just  described  and  rep- 
resented by  Figure  3  is  used  by  some  bookkeepers.  In  the 
extreme  left-hand  column  are  placed  the  letters  of  the  alpha- 
bet, the  six  following  columns  are  for  the  vowel  sub-divisions 
of  each  letter.  The  last  column  shows  the  number  of  pages 
assigned  to  each  letter.  The  large  figures  under  each  vowel 
represent  the  number  of  pages  which  are  to  be  assigned  to 


806 


THE    PRACTICAL  WORK  OF   A   BANK 


A 

E 

I 

0 

U 

V 

Total 

A  

/ 

60 

6/ 
100 

/«/ 
55 

a,/  6 
40 

A  4*6 
25 

5L*/ 

10 

290 

B  

a?/ 
110 

vo/ 
140 

Sff 
96 

637 
105 

740 
80 

ff&o 
30 

559 

c  

f$~o 
79 

1M 

•    93 

/oaa 
53 

/or*  ' 
60 

/'3-p 
24 

114-9 
11 

319 

Total 

itoi 
249 

tilt 

333 

>rsv 
203 

tisv 
203 

a./^7 
129 

ia«T6 
51 

1168 

FIGURE  3. 

it.  The  small  figures  in  the  upper  left-hand  corner  of  each 
division  show  the  number  of  the  page  upon  which  the  book- 
keeper is  to  begin  writing  the  names  under  each  vowel. 

In  spacing  a  ledger  the  bookkeeper  should  remember 
that  as  a  rule  the  letters  of  the  alphabet  requiring  the  larg- 
est number  of  pages  are  B,  C,  H,  M,  S,  and  W.  The  let- 
ters U,  X,  Y  and  Z  usually  require  fewer  pages  than  any 
other  letters.  In  fact,  it  is  hardly  necessary  to  subdivide 
these  letters  into  vowels. 

Another  suggestion  which  might  be  of  some  advantage 
in  spacing  the  ledger  is  to  enter  the  letter  and  vowel  on  the 
upper  corner  of  each  page  to  which  it  belongs.  This  method 
practically  indexes  the  ledger  all  the  way  through  and 
makes  it  unnecessary  to  consult  a  separate  index.  It  will 
also  assist  in  posting. 

When  the  bookkeeper  has  succeeded  in  spacing  his  ledger 
the  most  important  part  of  the  task  of  opening  the  new 
ledger  is  accomplished.  Taking  the  index  or  the  charts  as 
prepared,  he  can  enter  the  ledger  headings  with  sufficient 
assurance  that  in  the  end  it  will  figure  out  right.  After 
the  new  ledger  has  been  properly  spaced  and  all  the  names 
transferred,  the  next  step  is  to  transfer  the  balances. 

Before  doing  this  some  accounts  that  have  been  car- 
ried for  some  time  in  the  old  ledger  can  be  weeded  out. 
Some  accounts  will  perhaps  have  only  a  few  cents'  balance 
which  has  been  standing  for  a  long  period,  ^ome  of  them 


BANK    ACCOUNTING  307 

may  have  been  dead  for  months.  The  balances  have  been 
left  standing  either  because  the  depositor  is  dead,  has  moved 
from  the  city,  or  has  simply  neglected  to  withdraw  it  and 
close  the  account.  When  such  balances  are  only  a  few  cents, 
the  bank  is  usually  safe  in  charging  them  off  and  closing  the 
account.  These  balances  may  be  credited  to  profit  and  loss, 
but  of  course  a  proper  memorandum  should  be  made  of  the 
transaction,  so  that  any  time  the  depositor  asks  for  a  state- 
ment of  the  account,  the  amount  could  be  credited  back  to 
his  account. 

There  will  be  other  accounts  with  larger  balances,  which 
perhaps  have  been  opened  temporarily  for  some  particular 
purpose,  and  although  dead,  the  depositor  has  neglected  to 
withdraw  his  balance.  Such  depositors  should  be  notified  to 
check  out  the  balance  so  that  the  account  can  be  closed  and 
a  statement  rendered. 

Some  bookkeepers  transfer  all  the  balances  on  the  ledger 
the  same  day  the  last  posting  is  made  for  that  day.  This  is 
a  tremendous  task  and  will  probably  keep  the  bookkeeper 
busy  until  the  "wee  hours"  of  the  morning,  but  it  is  no 
doubt  the  most  satisfactory  way  when  completed.  Just  be- 
fore transferring  the  balances  to  the  new  ledger  it  is  neces- 
sary when  this  method  is  pursued  to  first  take  off  a  trial 
balance  of  the  old  ledger.  If  the  trial  balance  does  not  come 
out  right  every  effort  is  made  to  find  the  discrepancy.  The 
balances  are  very  carefully  checked  over  from  the  ledger  at 
least  once,  to  see  that  they  have  been  properly  copied. 

It  is  not  absolutely  essential,  however,  that  the  trial  bal- 
ance of  the  old  ledger  comes  out  right  before  the  balances 
are  transferred  to  the  new  ledger.  In  fact,  in  order  to  ac- 
complish the  task  within  the  allotted  time  it  is  necessary  to 
begin  transferring  the  accounts  as  soon  as  the  trial  balance 
is  taken  off  and  checked  up.  As  soon  as  all  the  accounts  are 
transferred  a  trial  balance  is  then  taken  off  of  the  new 
ledger.  If  the  trial  balance  of  the  old  ledger  does  not  agree 
with  the  trial  balance  of  the  new  ledger  it  is,  of  course,  evi- 
dence that  the  balances  have  not  all  been  transferred  cor- 
rectly. The  quickest  way  then  of  finding  the  error  is  to 
check  up  the  trial  balances  with  each  other.  As  soon  as  the 
two  trial  balances  are  made  to  agree  it  is  ample  proof  that 
the  balances  have  been  correctly  transferred  from  the  old 
ledger  to  the  new.  This  much  accomplished,  the  bookkeep- 


THE  PRACTICAL  WORK  OF  A  BANK 


TRIAL 

BALANCE  SHEET 

New  Balances 

Old   Balances 

5 

# 

4  2  0.3  5 

2  3.4  5  1 

31.03 

4.251 

21.0  4 

5.701 

1.251 

New  Overdft 

3  0  6.0  8 

1  20:5  61 

1,0  80.2  7 

305.911 

3  01.O3 

3  4.0  5  1 

Old  Overdft         4  O.5  6 

2.45 

6  3.0  4  1 

13.35 

4.251 

2.0  3  0.4  5 

1,0  2  3.0  5  1 

41.0  4 

6.001 

3  00.00 

4  4-0  0  1 

New  Account      3  3  0.5  0 

20.4  5 

1  5.0  6  1 

5  3  0.8  0 

5  3.0  0  1 

72.3  7 

4  0.6  6  1 

7  7  3.0  0 

4  0.7  0  1 

Old  Overdft         5  2.4  0 

72.04 

5  0.2  4  1 

7  7  2.0  4 

40.071 

8  0  4.2  0 

5  00.7  61 

52.04 

6  0.3  5  i 

New  Account          8  0.4  3 

1.25 

3  1.0  3  1 

3.4  5 

2.4  51 

4.0  5 

1.5  51 

8.301 

Closed  Account 

4  4  6.0  9 

1  0  5.0  9  1 

3  0  6.0  0 

30.071 

72.00 

6.031 

1  2.4  5  1 

Wew-Overdft 

3  3  4.0  5 

3  1.0  5  1 

Total  Dr       9,3  1  4.8  1  * 

-   2,663.34$ 

Total   Cr 

A    TlllAL    HAI.ANCK    SHEET    MADE    ON    A    BURROUGHS    DUPLEX    MACHINE.       BOTH 
AEE   LISTED  AT  THE   SAME   OPERATION   AND  INDEPENDENT 
TOTALS   TAKEN   AT  THE   SAME   TIME 


BANK    ACCOUNTING  809 

er  may  then  search  for  the  difference  which  may  exist  be- 
tween the  trial  balances  and  the  balance  as  shown  by  the 
general  ledger. 

Some  bookkeepers  do  not  take  a  trial  balance  off  of  the 
old  ledger  before  transferring  the  balances  to  the  new  ledger. 
They  simply  transfer  the  balances  to  the  new  ledger  and 
take  off  a  trial  balance  of  that  ledger  only.  The  defect  of 
this  method,  however,  is  apparent.  By  this  method  the  only 
way  the  bookkeeper  has  of  proving  that  he  has  forwarded 


THE   BURROUGHS  DUPLEX  MACHINE THE   MACHINE    WITH 

THE  DOUBLE  SET  OF  ADDING  WHEELS 


all  the  balances  correctly  is  by  checking  up  the  trial  balance 
of  the  new  ledger,  or  the  new  ledger  itself,  with  the  balances 
on  the  old  ledger.  This  is  not  only  a  more  arduous  task, 
but  takes  longer,  and  even  when  the  process  is  completed  is 
not  conclusive  proof. 

One  bookkeeper  has  a  rather  unusual  method  of  trans- 
ferring accounts. from  the  old  ledger  to  the  new.  He  trans- 
fers them  in  sections.  That  is,  one  day  he  will  transfer  the 
balances  under  a  certain  number  of  the  letters  of  the  alpha- 
bet. He  takes,  say,  the  balances  under  A,  B,  C,  and  D,  the 
first  day,  those  under  E,  F,  G,  and  H,  the  second  day,  and 
so  on,  until  all  are  forwarded.  Each  section  transferred  to 
the  new  ledger  is  proven  with  the  corresponding  section  of 


810  THE   PRACTICAL  WORK  OF   A   BANK 

the  old  ledger.  As  each  section  is  forwarded,  no  more  items 
are  posted  to  that  section  on  the  old  ledger.  The  posting 
is  done  to  the  accounts  that  have  been  transferred  to  the 
new  ledger,  while  the  posting  is  still  done  to  the  accounts  in 
the  old  ledger  that  have  not  been  transferred.  Under  this 
method  the  posting  is  done  in  two  separate  ledgers  until  all 
the  accounts  are  forwarded.  There  is  a  great  deal  of  risk 
about  this,  owing  to  the  danger  of  getting  the  ledgers  con- 
fused. For  this  reason  most  bookkeepers  would  not  ap- 
prove of  such  a  method. 

There  is  another  method  by  which  only  part  of  the  bal- 
ances are  transferred  each  day,  but  from  the  first  day  any  of 
the  balances  are  transferred  the  posting  is  done  from  that 
date  in  the  new  ledger.  For  instance,  the  balances  under 
A,  B,  C,  and  D  only  are  transferred.  Deposits  and  checks, 
however,  are  posted  to  the  accounts  under  the  remaining 
letters  of  the  alphabet,  just  as  if  the  balances  had  been  for- 
warded from  the  old  ledger.  Of  course,  for  the  time  being 
the  postings  cannot  be  added  or  deducted  from  the  previous 
balances,  which  have  not  as  yet  been  transferred,  and  car- 
ried to  the  balance  column.  As  soon  as  these  balances  are 
forwarded,  however,  the  accumulated  credits  and  debits  are 
added  or  deducted  separately  from  the  balance  and  each 
balance  is  forwarded  to  the  balance  column.  As  soon  as 
all  the  balances  are  transferred  the  trial  balance  must  agree 
with  the  old  ledger,9 

The  sheets  that  are  shown  on  the  flat  platen  of  this  ma- 
chine10 are  the  monthly  statement  of  account  on  top,  the 
ledger  page  between  the  two  carbon  strips,  and  the  proof 
sheet,  or  auditor's  journal  page  at  the  bottom.  The  machine 
can  be  operated  on  just  the  ledger  page,  or  the  ledger  page 
and  auditor's  proof  sheet  without  the  statement,  if  so  de- 
sired. The  registers  at  the  top  of  the  picture  accumulate 
totals  and  the  crossfooter  at  the  right  figures  each  account 
as  the  postings  are  made. 

The  operation  is  as  follows:  The  old  or  last  balance  is 
typed  into  the  first  column,  and  as  it  is  typed,  without  any 
other  operation,  it  is  picked  up  or  accumulated  in  the  cross- 
footer  at  the  right.  The  next  four  columns  are  checks  paid, 
and  as  these  are  typed  they  are  added  in  the  registers  at  the 

•Edgar  G.  Alcorn  in  Tht  Bankers  Magazine. 
"Shown  on  page  311. 


BANK    ACCOUNTING 


811 


BANK     BOOKKEEPING    MACHINE LISTS    DEPOSITS    AND    MAKES    ITS    OWN     ADDITIONS     AND 

SUBTRACTIONS IT   OPERATES   AS   DESCRIBED   ON    PAGE   310. 

top  of  the  machine  and  are  automatically  subtracted  in  the 
crossfooter  from  the  old  or  last  balance.  The  next  column 
is  for  deposits,  and  as  the  deposit  is  typed  it  adds  in  the 
register  at  the  top  of  the  machine,  and  also,  without  further 
operation,  adds  in  the  crossfooter. 

The  crossfooter  now  shows  the  depositor's  new  balance, 
and  the  new  balance  is  then  typed  in  the  last  column,  and 
as  it  is  typed  it  subtracts  in  the  crossfooter  and  the  cross- 
footer  clears.  The  fact  that  the  crossfooter  clears  proves 
that  the  entry  has  been  accurately  made,  or  else  figures 
would  remain  in  the  crossfooter.  The  checks  paid  accumu- 
late in  the  registers  at  the  top  and  the  deposits  accumulate 
and  show  at  the  end  of  the  day  a  total  of  all  checks  paid 
and  a  total  of  deposits. 

One  of  the  most  valuable  features  of  this  machine  is  the 
auditor's  journal,  or  proof  sheet.  All  transactions  of  the 
day  that  are  entered  on  the  machine  are  entered  on  the  proof 
sheet  so  that  the  cashier  or  whoever  is  responsible  for  the 


312  THE    PRACTICAL  WORK  OF   A   BANK 

control  of  accounts  has  the  complete  detail  before  him, 
which  shows  the  name  of  the  bookkeeper  that  makes  the  en- 
try, and  name  of  each  individual  depositor  whose  account 
has  been  affected  and  shows  his  last  and  his  new  balance. 

This  picture  shows  operation  on  loose  leaf  ledgers,  but 
the  machine  is  also  constructed  for  holding  an  entire  ledger, 
so  that  each  account  may  be  posted  without  taking  the 
leaves  out  of  the  ledger.11 

BALANCING  PASS-BOOKS 

In  the  balancing  of  the  depositor's  pass-book  the  bank 
comes  into  close  personal  touch  with  its  depositors,  and 
should  not  regard  this  as  a  necessary  evil,  for  it  should  be  a 
very  essential  detail.  Entries  should  not  be  made  carelessly, 
as  if  it  did  not  matter,  for  the  book  is  the  depositor's  re- 
ceipt for  his  deposit,  and  is  important  both  to  him  and  the 
bank.  A  slovenly  kept  book  will  indicate  that  the  bank  is 
careless,  which  it  cannot  afford  to  be.  However  ill  the 
depositor  may  treat  the  book,  the  bank  should  use  care. 

Some  depositors  do  not  want  a  statement  rendered,  but 
want  their  book  balanced,  and  vouchers  listed  in  the  book; 
and  if  so,  it  pays  to  accommodate  them — they  may  have  a 
reason;  and  a  bank  must  live  by  its  depositors.  The  old 
Irishwoman  had  it  right  when  she  said:  "It's  the  likes  o'  me 
that  keeps  the  likes  o'  you  on  your  job." 

This  balancing  should  not  be  done  by  the  bookkeeper, 
nor  from  the  ledgers,  and  deposits  not  entered  by  the  teller 
should  be  entered  from  the  slips.  Some  banks  are,  of  course, 
so  small  that  balancing  must  be  done  by  the  bookkeepers,  or 
some  clerk  who  is  general  utility  man. 

When  the  account  is  overdrawn  the  account  cannot,  of 
course,  be  balanced  and  the  vouchers  should  not  be  returned 
until  the  overdraft  has  been  made  good.  The  vouchers  are 
the  bank's  evidence  of  payments  and  should  not  be  returned 
until  the  matter  is  adjusted. 

Books  should  be  balanced  frequently,  and  if  not  sent  in 
should  be  called  for  and  not  allowed  to  run  long  without 
balancing.  This  should  be  insisted  upon.  Country  banks 
are  more  lenient  than  city,  as  their  methods  are  not  so  rigid 

"By  courtesy  of  the  Elliott-Fisher  Co.,  Harrisburg,  Pa. 


BANK    ACCOUNTING  818 

and  their  help  often  insufficient  to  do  all  things  as  per 
schedule. 

In  the  statement  settlements,  some  banks  do  not  render 
the  statement  without  the  book,  making  the  balance  therein, 
while  others  ignore  the  book  and  render  statements  month- 
ly. Checks  are  now  usually  run  off  on  the  adding  machine 
unless  for  some  reason  they  are  to  be  listed  in  the  book  in 
ink.  Deposits  without  the  book  are  a  nuisance,  and  inas- 
much as  the  entry  must  be  made  from  the  ticket,  which  has 
been  filed  away,  such  practices  are  not  to  be  encouraged. 
Duplicate  deposit  tickets  are  sometimes  issued  as  a  receipt, 
to  be  entered  in  the  book  when  presented.  Moreover,  when 
the  book  is  left  for  balancing,  the  entries  cannot  be  made 
while  the  book  is  in  the  bank's  possession  and  for  this 
reason  the  statement  system  is  the  better  way. 

THE  STATIONERY  AND  SUPPLIES 

Buying  stationery  is  like  buying  a  woman's  garment — 
you  can  pay  as  much  as  you  like,  and  must  be  a  judge  of 
quality,  or  you  pay  too  much.  The  waste  in  supplies  la 
enormous.  Buying  is  often  done  without  regard  to  the  util- 
ity of  the  article,  or  the  needs  of  the  business.  Scratch  pads 
are  often  made  of  finely  engraved  linen  letter  heads  which 
could  have  been  cut  down  and  used  for  better  purposes. 
Pencils,  pens,  erasers  and  stationery  in  general  are  wasted 
for  lack  of  system. 

A  bank  of  all  institutions  should  not  be  small,  and 
should  buy  for  quality  as  well  as  for  cost ;  but  it  can  be  sav- 
ing. Ink  should  be  bought  in  quantities  and  kept  in  good, 
non-evaporating  ink  wells.  Pens  should  be  purchased  in 
great  gross  lots  and  doled  out  as  needed.  Books  should  be 
ordered  in  time  to  allow  for  proper  "seasoning"  or  they  will 
come  in  "green"  and,  therefore,  warp,  and  prove  unsatis- 
factory. Where  there  is  likelihood  of  frequent  change  of 
officers,  letter  heads  should  not  be  bought  in  large  quantities, 
for  a  change  makes  the  old  valueless. 

Check-books  and  pass-books  constitute  a  very  large  item 
of  the  stationery  expense  and  should  be  bought  in  quantities 
after  competitive  bidding  on  the  same  paper  and  for  the 
same  amount.  So  close  does  this  competition  at  times  be- 
come, that  it  is  reported  that  a  firm  lost  money  on  a  bid  of  a 


814  THE    PRACTICAL  WORK   OF   A   BANK 

million  checks  where  it  neglected  to  estimate  the  cost  of  the 
string  and  delivery  charges,  the  checks  going  to  different 
branches  at  different  times  during  the  year. 

Stationery  is  best  kept  in  a  stock  room  arranged  in  the 
form  of  a  card  cabinet  with  compartments  of  various  sizes, 
labeled  or  numbered.  The  forms  should  be  inde'xed  as  to 
number  and  particularly  as  to  title.  The  printer  should 
number  the  form  as,  for  instance,  "55-1,000  6/9/14,"  indi- 
cating that  the  order  was  placed  on  June  9,  1914,  for  1,000 
and  is  number  55  in  the  index  of  forms.  The  cost  can  be 
indicated  in  the  index  of  this  form.  When  the  order  has 
been  placed  and  delivered  and  the  receipt  of  goods  checked 
by  the  clerk  in  charge,  the  bill  is  referred  to  the  proper 
officer  for  payment. 

The  stock  is  checked  over  occasionally  and  when  the  sup- 
ply of  any  article  is  running  low,  a  new  order  placed.  No 
form  should  be  ordered  without  going  over  carefully  to  see 
if  it  cannot  be  improved.  Few  forms  are  perfect.  One 
large  bank  in  New  York  keeps  account  with  each  form, 
accounting  for  all  received  by  a  careful  system  of  audits. 

One  bank  keeps  its  records  of  stationery  and  supplies  by 
a  regular  double  entry  system  of  bookkeeping.  When  a 
new  order  of  envelopes  is  received,  the  "envelopes"  account 
is  debited  with,  say,  25,000  and  a  general  account  credited 
with  the  same  amount  and  the  cost  put  opposite  the  entry 
in  this  account.  When  some  department  needs  envelopes  a 
requisition  is  made  on  the  stationery  department,  and  the 
amount  charged  to  the  account  of  that  department,  and 
credited  to  the  envelope  account.  Charges  are  made  to  the 
accounts  of  the  various  departments  which  use  the  enve- 
lopes to  ascertain  the  cost  of  operation.  Thus,  a  balance 
sheet  can  be  taken  off  proving  the  exact  amount  in  the 
supply  man's  hands.  Moreover  such  procedure  shows  ex- 
actly how  much  stationery  has  gone  to  each  department  and 
its  cost.  The  time  involved  in  keeping  such  a  system  makes 
it  more  expensive  than  the  amount  saved  would  warrant, 
except  in  the  case  of  very  large  banks  where  some  exact  sys- 
tem is  absolutely  necessary.  In  a  smaller  bank  a  careful 
watch  for  wastefulness  and  a  reasonable  investigation  of 
requests  for  supplies  will  serve  the  purpose. 

The  chief  clerk  often  has  the  care  of  the  records  of  the 
bank,  by  which  is  meant  books,  letters,  tickets,  etc.,  which 


BANK    ACCOUNTING  815 

have  ceased  to  be  used  by  the  various  departments,  and 
have  become  the  past  records  of  the  bank.  In  many  grow- 
ing banks,  and  where  consolidations  have  taken  place,  this 
is  a  serious  matter.  One  man  should  see  that  everything  is 
properly  labeled,  dated  and  stored  away  where  it  can  al- 
ways be  found  quickly.  The  deposit  tickets,  exchange  slips, 
letters  of  the  correspondence  department,  etc.,  should  be 
kept  about  six  years.  All  books  should  be  retained  for 
about  the  same  period,  except  the  ledgers  which  should  be 
retained  as  long  as  possible.  It  is  advantageous  to  keep 
records  and  items  which  are  likely  to  be  called  for  at  fre- 
quent intervals,  in  such  shape  for  a  year  or  more  back,  that 
they  can  be  gotten  at  quickly.  Unless  a  very  complete  sys- 
tem of  storing  all  these  records  or  vouchers  is  devised  and 
very  carefully  followed  up  by  some  one  in  authority,  they 
are  bound  to  get  into  a  chaotic  condition. 

THE  BANK'S  EXPENSES 

In  paying  the  bank's  expenses,  no  better  form  could  be 
devised  than  the  voucher  check,  which  classifies  the  charge 
for  entry  to  expense  account.  After  the  invoice  has  been 
properly  verified  and  payment  authorized,  the  amount  is 
entered  on  a  voucher  record  with  the  name,  amount,  date 
and  purpose,  and  classification,  and  voucher  check  issued. 
When  this  comes  back  it  is  charged  to  expense  account  un- 
der its  regular  heading  as  indicated  on  the  voucher.  The 
unpaid  vouchers  would  indicate  the  amount  of  unpaid  bills. 
Or,  if  desired,  the  entry  could  be  made  against  expense  ac- 
count as  soon  as  the  check  was  issued,  which  would  be 
preferable.  Some  banks  pay  by  cashier's  check,  cash  over 
the  counter,  and  take  simply  the  receipted  invoice  as 
voucher.  But  a  uniform  record  is  much  to  be  desired,  and 
the  original  invoice  can  be  attached  to  the  voucher  check 
after  it  has  been  paid. 

Some  banks  make  the  expense  items  a  matter  of  record 
on  the  minutes,  which  would  seem  a  waste  of  time  and 
effort,  a  proper  audit  by  a  committee  being  all  that  is  neces- 
sary. But  having  done  so  in  the  past  they  must  always 
continue  to  do  so. 


316  THE    PRACTICAL   WORK   OF   A   BANK 

PETTY  CASH 

There  are  many  petty  items  that  must  be  paid  for  and 
for  which  no  voucher  can  be  had,  such  as  car  fare,  stamps, 
etc.,  and  these  should  have  tickets  properly  initialed; 
but  petty  cash  can  best  be  kept  by  the  "imprest  system." 
Some  banks  keep  these  petty  items  and  hold  them  as  cash 
for  a  time  and  charge  them  up.  The  imprest  method  is 
better.  In  this  system,  the  teller  is  charged  with  an  amount 
sufficient  to  cover  a  month's  petty  expenses,  and  this  charge 
stands  against  him,  the  cash  being  segregated  from  his  coun- 
ter money.  As  he  pays  bills,  his  petty  cash  runs  down, 
until  it  becomes  necessary  to  replenish  the  petty  cash,  when 
he  renders  account  of  the  items  paid.  Check  is  drawn  to 
cover,  or  cash  taken  out  of  regular  cash,  which  restores  the 
account  to  its  original  amount.  This  is  recommended  by  ex- 
perienced accountants  as  the  proper  way.  A  petty  cash- 
book  may  have  columns  to  provide  for  classifying  the  pay- 
ments as  expense  account  classifies  the  larger  payments. 

Expense  account  should  be  run  on  the  columnar  idea, 
with  a  column  for  each  class  of  expense,  such  as  light,  heat, 
stationery,  incidentals,  etc.,  so  that  the  aggregate  of  the  ex- 
pense items  may  be  known,  and  if  desired  compared  from 
year  to  year  to  ascertain  the  relative  cost  of  management 
and  expenses. 

CHANGES  IN  ACCOUNTS 

For  the  information  of  the  officers,  changes  in  accounts 
are  noted  from  day  to  day,  particularly  those  that  have  been 
closed.  The  reason  is  ascertained,  if  possible,  so  that  any 
error  or  misunderstanding  may  be  corrected.  It  costs  con- 
siderable to  secure  an  account,  and  it  should  not  be  lost  to 
the  bank  without  good  reason.  Accounts  opened  and  closed 
are  reported  to  the  officers  daily,  with  details  concerning 
balances,  etc.,  for  their  guidance. 

In  the  competition  for  accounts,  some  banks  make  note 
of  checks  going  through  their  hands  and  thus  obtain  a  list 
of  the  depositors  of  other  banks.  This  gives  the  executive 
force  definite  information  to  work  upon  in  securing  new 
business.  And  as  soon  as  a  liquidation  or  an  absorption  is 
rumored,  the  competitor  banks  bestir  themselves  to  obtain 


BANK    ACCOUNTING  817 

the  accounts  of  the  bank  going  out  of  business  and  this  is 
the  clue  upon  which  they  work. 

CARE  OF  CHECKS  AND  DEPOSIT  TICKETS 

Until  the  vouchers  are  returned  and  the  account  recon- 
ciled, the  checks  paid  by  the  bank  are  important  documents 
and  are  given  careful  attention.  They  are  filed  in  check 
files,  under  the  name  of  the  depositor,  as  they  are  paid  and 
not  according  to  their  date.  The  pass-books  are  written  up 


AV«c  Dtauuu  ~«=_'^  .  —  - 

t"*r<*  />«*-  K*"!"—  •••"-• 

ACCOUNT  CLOSED 

c^^f^l-Z-lTT 

Remittance  Dept.  —  X""  . 

O                                    A 

2 

Jfame..  *xer€v/W.    ^3>  .  JV\a_fcDt£^cv'  

P 

/I 

U         Addres*     .1  o  q  ^>  (3  **£_  .    J±TS*^.  ...  ..,. 

B 

—  -    *  ~"'-                                                        M 

/TN 

z 

Date  closed^.       ^-c-V  ,     &•  3      _  Balance  wllhdravm    _.sJ 

-C^r  .    -vSi:  J  __• 

O 

Reason  for  Closing  :_"^fewfc..-jBU*VMt,  ..^w-V-    «rf-    6nAA. 

5B 
*-^^-e»-*»   -  g 

fiewwir/fc«.- 

0 

JV 

H 

0 

C 

33 

W 

C! 

MEMO.     OF    ACCOUNT    CLOSED,    FOR     INFORMATION     OF    CREDIT    DEPARTMENT 

from  these  vouchers  and  in  the  statement  system  they  are 
used  independently  of  the  ledger  records.  Checks  are  can- 
celled by  mutilating  as  soon  as  they  are  paid. 

Deposit  tickets  are  filed  according  to  date  and  the  sub- 
division of  the  ledgers.  They  are,  of  course,  not  returned 
to  the  depositor,  being  kept  for  a  certain  length  of  time  and 
then  destroyed.  Some  banks  keep  them  indefinitely.  One 
large  New  York  bank  keeps  the  letters  which  come  from 
depositors,  and  are  used  as  deposit  tickets,  for  a  certain 
length  of  time  after  the  account  has  been  reconciled,  and 
this  is  given  careful  attention.  After  reconciliation  the  let- 
ters are  destroyed  after  a  stated  time. 


818  THE   PRACTICAL  WORK   OF   A   BANK 

KEEPING  THE  BANK'S  BOOKS  BY  MACHINERY 

In  the  preface  of  this  work  it  is  said  that  the  only  material 
change  that  has  taken  place  in  banking  methods  during  recent 
years  has  been  the  installation  of  mechanical  appliances  for 


CHECK   CANCELLING   MACHINE   AND   ITS  WORK 
(Courtesy  of  B.   F.  Cummins  Co.,  Chicago,   111.) 


bookkeeping  purposes ;  and  nowhere  is  this  change  more  no- 
ticeable or  effective  than  in  keeping  the  accounts  with  depos- 
itors, in  respect  to  both  the  internal  and  external  operations. 

Mechanical  bookkeeping  is  as  far  in  advance  of  the  pen- 
and-ink  method  as  the  typewritten  letter  is  preferable  to  the 
hand-inscribed  missive.  The  mechanical  bookkeeper  has  for 


BANK  ACCOUNTING 


318a 


\ 

u 

*  *        ft  «        O*  *             *       #*«**«:#        *  * 

z 

2 

oS     o^     wo*"        C    "oSSomo     £* 

D 

OH     o  10     co  H  o\  CT>        o     in  u>  f>  tN  >o  H  t*-     O\H 

B 

vo  in     oo  f\     *o     oo  o\        H    ooinGonmn     oco 

Z 

5fin     von     n     -<tin        o     ovo«r>NOkOO     fxo 

c 

, 

H                   H"H        rTrT       rirT 

i 

c 

TIN       n  *       «  <n  *  N            n       •»  v>  «  «  o  <»  « 

J 

c 

c 

E 

1 

a:   or         ge  y        aKKK              ex        <r  c  or   a   a   or   K         ca 

S*     5^     4^55        i    iiiiili     M 

cz 

C 

^ 

f 

O 

oo     oo     ooooooo     omoo     oo     oo 

4 

a 

O 

6 

qq     qq     inqqqqqq     qvoqq     qq     oo 
oo     om    woodddd    diridd     do     do 

IT 

g 

0 

oo     ow     Hinooomw    o    oo    ot     mo 

M 

0 

in 

ri  H       (V)  rl                in  W  W       (M      (VI      W  H      Oi            ^^ 

1 

c 

" 

c 

e 

M 

* 

•H    H    H    r(          Tlrlrlrl          OJ    M           fg    n 

J 

ID 
ft 

E 

tc 

•  : 

ortx         age        tx  a   cr   <r   a:   or  or        or  a   a  or        a   or         y  a: 

i<       <<      lii%55<      ^4l<      <l      <5 

X        ^ 

c 

U 

Q 

1          1     1     1     1     1     1          II               1               1     t     1     1          1          1 

^^^^  ^^ 

5 

"^ 

1 

o     oooooo     oo        o        oooo     o    in 

1 

^ 

Q 

q     qqqqqq     qq         q         qqqq     q     i«. 

2: 

m     nnOOnvi     oo        o        invotnin     m     in 

S 

•<t            r»H     •*     tnm        «n        •*     -*w           w 

0 

u. 

H                               n 

0 

U 

i   i   i   i   i  i  i   i  i   i  i          i          i  i  i  i      i      i 

Z 

ooooooooooo        o        oomo     •*     o 

< 

3 

qqqqqqqqqqq         q         qq.Nq     *)     iq 

o 

to 

om  ^  ^w  't  om  ^mtn        o        omvom     w     w 

_^^ 

z 

m                    m                       o         o     m         H     TH 

r~ 

• 

H        in     vo 

u 

^*~—^ 

I 

^ 

u 

i   i   i   i   i   i   i   i   i   i   i          i   i   i   i   i   i   i   i   i   i   i 

oooovoooomvoo        ooomooooooo 

oxioiniqoooitmm.         oooNirjoininooo 

mn  mwt  ooom^^t        movovo^  o^tooo 

•^     •*Hmtr>ot*     m               m        m  rn  m  rn  m  in  in 

CVI       rltO                                                      H 

S 
\ 

nHifuni  iiiiiiiiiii 

CT 

000       0^       ^voo»n           «      lOCDtOMCOCDCO       ^t 

QOin     Q^     ojQ^Oi         ^     ^Oiocootf^o     f** 

u 

OOr<       O  IT)       COTiO\O*            O       lf>lO(Or*"VOHt*»       Ok 

u 

z 

ovom     coto     \o     coo^        tH     ooioconmia     u> 

tn-^m     u>io     ta     ^m        oo^ch^^ovoo     n 

a 

"                           T^  T1          T^  tn          Tl 

i 

o 

o 

y 

si8b  THE  PRACTICAL  WORK  OF  A  BANK 

its  aim:  first,  the  saving  of  time  in  the  more  rapid  posting 
possible;  second,  the  elimination  of  the  nerve  strain  of  con- 
stant mental  addition  and  subtraction;  third,  automatic  pre- 
vention of  overdrafts;  fourth,  the  improved  appearance  of 
the  books;  fifth,  the  avoidance  of  opening  new  ledgers;  and 
last,  but  by  no  means  least,  is  the  abolition  of  the  pass  book, 
other  than  as  a  memorandum  of  deposits. 

The  statement  system  which  coordinates  with  the  machine- 
posted  ledger,  acts  as  a  check  on  the  work,  and  at  the  end  of 
the  month  constitutes  the  "account  stated"  with  the  depos- 
itor, thus  eliminating  the  writing  up  of  pass  books.  In  the 
average  bank,  running  one  or  two  old  style  and  pen-kept 
ledgers,  the  writing  up  of  pass  books  necessitates  consulting 
the  ledger  for  missing  entries,  and  this  cannot  be  done  with- 
out disturbing  the  bookkeeper,  and  results  in  night  work  with 
all  its  attendant  unpleasantness. 

By  merely  pressing  the  keys  and  the  electric  release,  the 
machine  does  in  one  operation  what  would  require  the  follow- 
ing five  operations  by  hand : 

1.  Writing  the  record. 

2.  Adding  deposits  to  old  balances. 

3.  Subtracting  checks. 

4.  Extending  balances. 

6.  Inserting  the  date  for  each  entry.  (The  machine  is  set  for  the 
day  with  proper  date,  and  prints  the  date  for  each  item  until  the  date  key 
is  changed.) 

Speed  is  obviously  possible  when  it  is  considered  that  the 
machine  prints  dates  and  ciphers  automatically  and  finds  its 
own  proper  columns  without  using  a  "spacing  key."  The 
operator  is  concerned  only  with  getting  the  items  on  the 
proper  sheets  and  pressing  the  keys  correctly.  The  time  re- 
quired to  take  a  sheet  from  the  ledger,  insert  in  the  machine, 
"pick  up"  the  old  balance,  list  three  checks  and  one  deposit, 
and  strike  the  balance  is  not  over  fifteen  seconds,  the  book- 
keepers of  the  First  National  Bank  of  Jamaica,  New  York 
City,  maintaining  this  speed  for  hours. 

How  THE  LEDGER  Is  POSTED  BY  MACHINE 

Loose-leaf  ledgers  or  cards  are  used,  each  page  represent- 
ing an  individual  account.  These  are  arranged  alphabetically 
in  binders  convenient  for  carrying  the  sheets  in  such  a  way 


BANK  ACCOUNTING 


S18c 


that  the  account  can  easily  be  located.     The  headings  are 
made  by  the  Addressograph,  shown  on  page  299. 

The  machine  operator  opens  the  ledger  at  the  first  ac- 
count for  which  he  has  checks  or  deposit  slips.  He  drops  the 
ledger  sheet  in  the  machine  carriage  and  throws  it  into  print- 
ing position. 


MAKING    A    LEDGER    POSTING    BY    MACHINE 


He  then  lists  the  old  balance,  the  checks,  and  deposits. 
The  machine  spaces  itself,  not  even  requiring  the  spacing  key 
used  on  some  typewriters.  The  old  balance  and  deposits  are 
automatically  added,  the  checks  automatically  subtracted,  and 
the  new  balance  is  extended  simply  by  depressing  the  total 
key.  The  sheet  is  thrown  out  by  one  pull  of  a  lever  on  the 
carriage. 


318d  THE  PRACTICAL  WORK  OF  A  BANK 

OVERDRAFTS  AUTOMATICALLY  DETECTED 

An  overdraft  is  immediately  detected,  because  the  oper- 
ator is  unable  to  take  a  total  in  the  balance  column.  Inability 
to  take  a  total  warns  the  operator  of  the  overdraft.  He 
shifts  the  control  lever  to  "subtract"  position,  takes  two  spac- 
ing strokes,  and  takes  a  total  which  is  marked  "QD." 

The  method  of  posting  that  has  been  in  use  in  the  First 


THE    BURROUGHS   BOOKKEEPING    MACHINE 


National  Bank  of  Jamaica  for  a  period  of  five  years,  and  has 
worked  without  an  error,  is  as  follows : 

As  the  checks  leave  the  teller's  cage  they  are  listed  and 
turned  over  to  a  clerk  who  examines  them  for  signature,  fill- 
ing, dates,  and  endorsements,  and  sorted  alphabetically; 
they  are  then  arranged,  checks  in  one  pile  and  deposits  slips 
in  another.  Postings  are  made  by  the  Burroughs  Machine 
shown  herewith,  the  "short  items"  being  taken  out  and  sub- 


BANK  ACCOUNTING 


318e 


/•"^ 

/       s 

1 

fi 

!  * 

* 

0      10 
I     0> 

i 

• 

_JL 

i 

*  *     *  o     *  3*  *        *     »««««#«     g  4 

oo     o1*     •'frvooin         «o     to  co  to  to  03  CD  co     TJ-ON 
qirj     q^      ovq-^oj         ^     •<£  q  to,  co  q  iq  q     t^^ 
OH     om     cDrirjkO*        o    m  m  to  r»  vo  H  r^     din 
vom     c0to     *o    oo  o»        ri     oomcotointo    ^co 

rT                  rTrT       rTrT       HrT 

o 

rl                 Tt          rlrlrlrllMNCM          M  to 
II          II          Illl                 1          Illllll          || 

THE  FIRST  NATIONAL  BANK  MONTH  UF  APRIL 

OF  JAMAICA.  NEW  YORK  CITY  95  VOIIPHFBS  RFTiiRNFn 
In  Account  WKh  .XiforJA/SiV 

MEMBER  John  Doe,  rif^^Mri 

FEDERAL  RESERVE  BANK  121g  jferket  p^^  ^jj^Sj? 

i 

M 
O 

o 
o 

0 
0 

in 

oo     oo    ooooooo     omoo    oo     oo 
qq     qq     iqqqqqoq     o\ooo     oo     oo 

Ok 

«| 

ri 

CO 

eo 

rl" 

O 

1  rM  Oahnl^  IN  -leMvl  C.  C.—  OrtitW  Owd  PJ«aseeiamin«  thia  statement  upon  receipt  and  report  at  once  if  you  find  any  difference  ao 
!  N.  D.-NU.  DI...I.I.J  F.  C.-E™C~t«»d  D.M-DiUMo*,  that  we  may  know  definrtety  whether  our  books  agree  with  your  own.  II  no  error  la  reported  in 
|  a.-Oliiiiin  RT.-HI  «  l»»  EX-firtim  ton  days  the  account  will  be  conaiderad  correct  All  »ems  are  credited  subject  to  final  payment 

r 

o 

oo     oin     cvioooodo     oiridd     do     do 
oo     ow     rimooomw     o     oo     ©•*     mo 

rlrl      Wrl                tf>  N  W       W      W      CM  rl      N            •*  ^ 
rf 

t 

II        II        Illllll        Illl        II        II 

CHECKS  IN  DETAIL 

i 

1          1     1     1     1     1     1          II               1               Illl          1          1 

o    oooooo     oo        o        oooo    o    m 
o     oooooo     oo        o        oooo     o     t^ 

1 

Ul 

in     to  n  o  o  in  m     oo         d         m<omin     m     u> 

rl                                             tO 

H                                                                                                 O 

*                                                                                                           LJ 

1    1    1    1    1    1   1    1    1    1    1           1           Illl       1       1 
ooooooooooo        o        oomo    •*     o 

OOOOOOOOOOO           O           OOl^O       JO,      iq 

o 

r 

o 

L 

0 
•r-  * 

b 

o  in  •**  •*  m  •<*  o  u>  •*  m  in        o        omvom     (M     w 
in                  to                      o        o     m        H     H 

rl            tO       VO 
1     1     1     1     1     1     1     1     1     1     1               1     1     1     t    1     1     1     1     1     1    1 

oooovjoooinvso        o  oomo  oooooo 
O  in  o  in  IQ  o  o  o  ^  in  in         o  o  O  t^  in  O  in  in  o  o  O 

in  10  in  CM  ^  o  o  o  in  ^  ^        m  o  ^o  ^o  "^  ^  "^  ^  ^  ^  ^ 
•*     •*  H  10  «o  o  t*-     m               m        in  in  m  m  in  m  m 

N       HtO                                                  rl 

i 

UHUIIUI    »j»n»n 

T 

s 

i 

ooo     o^f     ^t^oo\to        to     tocototocooooo     ^J* 
qqin     q-^     o\q-*cA         ^     XQ'Oopqioq     t>; 
ddri     din     CDHO\O\        o     in  in  10  r»  <o  H  r-»     cK 
o>oin     coto     vo     CDO»        ri     oomoDtomto     vo 
initm     vom     to     •*«        o     O\CAM^O\OO     to 

THE  PRACTICAL  WORK  OF  A  BANK 

tracted  from  the  adding  machine  list.  The  deposits  and 
checks  are  then  run  on  the  permanent  check  and  deposit  reg- 
isters by  the  adding  machine,  and  the  total  must  agree  with 
the  list  first  made,  less  the  short  items.*  The  next  morning 
the  statement  clerk  makes  the  same  entries  on  the  statement 
sheets,  "off-setting"  his  sheets  as  the  bookkeeper  has  already 
done.  The  accounts  that  have  been  changed,  which  are  indi- 
cated by  the  off -set  sheets,  are  called  back  as  to  the  net  bal- 
ance only,  which  of  course  must  agree  with  the  ledger  ac- 
counts, for  the  same  work  has  been  done  by  two  different  men 
on  two  different  sheets  from  the  same  original  items.  The 
deposit  tickets  are  bundled  and  filed  for  the  day,  and  the 
checks  are  filed  in  the  check  files. 

Before  the  installation  of  the  machine  system,  the  clerks 
were  obliged  to  work  from  two  to  four  nights  a  week,  prin- 
cipally writing  up  pass  books ;  whereas  after  the  machine  sys- 
tem was  introduced  night  work  was  reduced  to  one  night  a 
month,  at  which  time  the  vouchers  are  prepared  for  distribu- 
tion. More  work  is  done  with  fewer  men  in  from  one  to  two 
hours  less  a  day  than  formerly  was  the  case. 

SAFEGUARDING  THE  LEDGER  SHEETS 

As  a  safeguard  to  the  ledger  sheets,  each  sheet  may  be 
numbered.  A  bank  officer  may  have  charge  of  all  ledger 
sheets  and  new  signatures,  and  make  a  record  of  each  sheet 
number  when  it  is  issued  to  the  bookkeeper.  When  a  cus- 
tomer's ledger  sheet  is  filled,  the  bookkeeper  must  turn  it  in 
to  him  and  a  new  one  is  issued  to  take  its  place.  This  plan 
overcomes  any  possible  objection  to  loose  leaf  ledgers  and 
avoids  the  possibility  of  substitution  of  ledger  leaves. 

THE  BOOKKEEPING  MACHINE  FOR  BANK  STATEMENTS 

Banks  all  over  the  country  have  discontinued  balancing 
customers'  pass  books,  sending  out  a  monthly  statement  in- 
stead. 

The  statement  system  eliminates  the  month  end  conges- 
tion, due  to  writing  up  of  pass  books,  because  the  work  of 

*It  has  since  been  found  better  to  post  first  and  make  the  check  list  after- 
ward, thus  assuring  that  checks  and  deposits  are  in  the  same  order  on  ledger  and 
check  and  deposit  lists,  and  to  avoid  changing  the  totals. 


BANK  ACCOUNTING 


318g 


making  statements  is  distributed  through  every  day  in  the 
month. 

A  great  deal  of  interest  has  developed  in  the  statement 
plan  as  applied  to  customers'  accounts  and  the  number  of 
users  is  constantly  on  the  increase,  because  the  balancing  of 
pass  books  has  always  been  a  problem  to  bankers,  and  they 
are  quick  to  appreciate  a  system  which,  besides  saving  time 
and  expense,  is  in  line  of  efficient  service  to  customers. 


s 

SHUT 

_                 ,_                J.I.Hoort 

.'.•.Moor. 

ssJ^rS:-;5-'    "—^  The  Fort  Worth  National  Bank,  T™*"" 

' 

._..,r.B^r... 

CHECKS 

DIBITS 

«»LA.VC« 

i,   3  as 

51.5 

500-'              3.  00-                    5.00- 
s                            -SO  0  -           4  7     .0  0  -                3  3.5  0  - 

es'.J 

86.2 

512 

20.50 
815.18 

s                               0.00  -                *     .5  0  - 
t         r                   OOO-                3.  00-                  55.00  - 
s                               1.00  -                      25  - 
A     0.00  -               3     .00  - 
s                               5.00  - 
Kf                        500-                    .50-                45.  00- 
xr                        320-                    .50- 
ur                  3     0.00-           47     .00-                   2-0.0  r 
SIP                        92  7  -              3    J  0  - 

itf  1  «             2  *  3.5  0  - 

=f  •  1,225.00 

nr  •  229.75 

:•-•  1  o  100.00 

e»      <             877.73. 

!_•     •            T71JZ5* 
:^10            366^5* 

•^  1  a             351iS« 

•  *r  11  3  0  0.0  0 
icro  B74.45 
»•>•  112.75 

^ 

so-ii           81SJ.8*. 
•I-t.             6  55.4  3  « 

! 

[in      n      n      n      J 

CUSTOMERS      MONTHLY     STATEMENT     MADE     OUT     ON     A     BURROUGHS 
LEDGER     POSTING     AND     STATEMENT     MACHINE 

The  First  National  Bank  of  Jamaica,  New  York  City, 
whose  form  is  shown,  illustrates  the  method  of  handling  state- 
ments under  the  daily  posting  method.  The  Statement 
Machine  subtracts  withdrawals  as  each  individual  check  is 
listed,  adds  deposits,  prints  dates,  and  automatically  marks 
balances  and  overdrafts.  The  statement  form  when  finished 
is  an  exact  duplicate  of  the  ledger  page. 

In  some  banks  the  checks  are  listed  in  vertical  columns; 
while  in  others  the  paper  carriage  cross-tabulates  automati- 
cally, listing  the  checks  in  three  different  spaces  across  the 


31 8h  THE  PRACTICAL  WORK  OF  A  BANK 

sheet.  The  machine  is  so  constructed  that  it  may  be  readily 
adjusted  to  handle  the  work  either  way. 

A  daily  balance  may  be  secured  by  adding  the  old  bal- 
ances and  subtracting  the  new  on  all  active  accounts.  *The 
difference  must  equal  the  difference  between  checks  and  de- 
posits for  the  day.  For  taking  off  old  and  new  balances  a 
special  key  can  be  set  on  the  machine  which  causes  it  to  alter- 
nately add  and  subtract. 

Before  sending  statements  to  customers  the  perforated 
margins  are  torn  off  and  retained  for  analyzing  the  accounts 
or  calculating  interest  on  daily  balances.  The  procedure  in 
making  up  statements  should  be  as  follows : 

(a)  See  that  the  checks  are  all  of  the  same  name. 

(b)  Count  the  checks  (while  verifying  the  fact  that  they 
are  all  alike). 

(c)  Check  off  on  statement  sheet. 

(d)  Count  number  of  items  on  sheet  and  see  that  it 
agrees  with  number  of  vouchers. 

(e)  Wrap  with  name  plainly  visible. 


*Or  a  proof  of  the  group  may  be  taken  daily,  semi-weekly,  etc. 

Note  to  Third  Edition:  Two  new  items  are  now  appearing  in  bank  state- 
ments that  heretofore  have  not  formed  a  part  of  the  same,  namely  (a)  "Liability 
of  Customers  on  Account  of  Acceptances."  This  represents  the  obligation  of  cus- 
tomers to  the  bank  arising  out  of  acceptances  made  for  their  account.  It  may 
be  represented  by  promissory  notes,  trust  receipts  or  other  instruments,  by  which 
the  customer  becomes  obligated  to  the  banH  to  reimburse  it  for  the  amount  of 
acceptances  so  made,  and  is  as  a  rule  in  the  same  amount  as  the  item  (b) 
"Acceptances  Outstanding'1  on  the  liability  side,  which  represents  the  obligation 
of  the  bank  arising  from  the  same  source.  When  a  bank  accepts  a  draft  for  a 
customer  it  is  obligated  to  meet  the  same  at  maturity,  and  must  therefore  set  up 
a  liability  for  the  same  amount  and  as  an  offset  it  has  the  obligation  of  the 
customer  to  it.  Otherwise  the  bank  would  have  outstanding  obligations  in  the 
nature  of  contingent  liabilities  unaccounted  for;  and  having  this  contingent 
liability  it  must  for  bookkeeping  reasons,  as  well  as  for  security  purposes,  have 
an  offsetting  asset.  These  two  items  will  usually  be  found  in  the  s.ime  amount 
on  both  sides  of  the  statement. 


CHAPTER  XI. 

CHECKS  AND  THEIR  COLLECTION 

Through  the  disappearance  of  sectional  lines  and  the 
knitting  of  the  country  together  by  the  railroads,  has  come 
the  growth  of  commerce,  so  that  no  section  is  now  sufficient 
unto  itself.  The  apples  of  Oregon  are  sold  in  New  York; 
the  fruit  of  California  in  Boston;  and  the  shoes  of  Massa- 
chusetts in  Texas. 

Trading  is  no  longer  confined  to  a  neighborhood.  Com- 
mercial transactions  are  largely  between  the  principal  cities, 
and  between  smaller  places  and  the  principal  cities.  For 
instance,  the  trade  between  New  York  and  St.  Louis  is 
large,  and  between  St.  Louis  ahd  the  surrounding  towns 
likewise  large,  every  large  city  acting  as  a  distributing  cen- 
ter for  the  adjacent  territory.  Banking  in  turn  follows  the 
course  of  trade.  The  suburban  merchant  remits  to  his  job- 
ber in  the  territorial  distributing  point,  and  he  in  turn  to  the 
house  in  the  large  city.  The  check  which  settles  the  debt 
follows  or  should  follow  approximately  the  same  route  as 
the  trade,  both  in  paying  the  debt  and  in  the  collection  of 
the  check  itself,  it  being  the  function  of  banking  to  settle 
the  debts  trade  creates. 

Domestic  trade  exchanges  do  not  balance  any  more  than 
foreign  exchanges.  The  farming  sections  produce  more 
than  they  consume.  The  crops  in  some  sections  are  large, 
while  in  others  small.  Manufactured  goods  are  exchanged 
for  raw  material  and  foodstuffs,  section  to  section,  but  there 
is  always  a  balance  which  must  be  paid  in  cash.  When  the 
crops  are  being  marketed,  funds  due  Western  banks  pile 
up  in  the  New  York  banks.  But  when  the  farmers  need 
funds  for  planting  and  harvesting,  these  debts  must  be  paid 
in  money.  The  home  bank  gives  the  farmer  credit  for  his 
wheat  draft  and  itself  gets  credit  in  New  York.  By  com- 
mon consent  New  York  funds  the  country  over  are  the 
basis  of  domestic  exchange,  for  the  reason  that  New  York 
funds  are  desired  everywhere,  and  generally  are  worth  par 
or  better.  New  York  being  our  chief  commercial  city,  the 
demands  of  business  make  it  necessary  that  most  banks  have 

319 


820  THE    PRACTICAL   WORK   OF    A    BANK 

a  New  York  balance,  and  by  virtue  of  this  desire  and  even 
necessity  of  maintaining  a  New  York  account,  New  York 
has  become  the  banking  center  of  the  country. 

Wherever  commerce  goes  banking  facilities  must  fol- 
low as  a  necessity,  and  the  greater  the  trade,  the  greater  the 
need  for  banking  accommodations.  The  merchant  in  Texas 
who  buys  a  lot  of  shoes  from  a  Massachusetts  manufac- 
turer pays  by  drawing  his  check  on  his  local  bank  and 
sending  to  the  seller,  who  must  turn  the  check  into  money 
as  soon  as  possible.  The  buyer  might,  but  it  is  not  likely 
that  he  will,  purchase  a  New  York  or  Boston  draft  (do- 
mestic exchange)  from  his  local  bank  and  forward  this  in 
payment;  he  is  more  apt  to  send  his  own  check,  for  two 
reasons:  First,  because  it  is  the  simplest  and  easiest  way 
and  costs  him  nothing  in  time  or  money;  and  secondly,  be- 
cause until  the  check  comes  home  for  payment  he  will  have 
the  use  of  the  amount  represented  thereby,  it  may  be  with 
interest. 

CHECKS   CIRCULATING   CURRENCY 

The  check  thus  sent  may  be  out  for  ten  days  or  two 
weeks,  passing  from  hand  to  hand;  from  bank  to  bank; 
settling  debt  after  debt;  providing  reserve  balances  for 
various  banks,  and  circulating  to  all  intents  and  purposes 
as  money,  and  answering  the  functions  of  money  admirably, 
so  long  as  conditions  are  normal. 

A  check,  however,  is  not  money,  and  even  though  it  may 
answer  the  purposes  of  money,  must  finally  be  redeemed  in 
money,  and  back  of  it,  therefore,  must  be  a  propor- 
tionate amount  of  money  or  suspension  of  payment  results. 

Banking  functions,  particularly  in  connection  with  bank 
checks,  are  becoming  better  understood  as  the  rank  and  file 
of  the  people  become  better  versed  in  the  ways  of  business. 
The  use  of  the  bank  check  is  coming  to  be  common ;  its  util- 
ity as  a  voucher,  its  convenience  as  a  mode  of  payment,  and 
its  safety  and  cheapness  as  a  form  of  remittance  more  fully 
appreciated  as  banking  has  expanded  and  new  banks 
have  been  created. 

GROWTH  OF  THE  USE  OF  BANK  CHECKS 

The  use  of  bank  checks  has  grown  enormously  of  late 
years.  With  the  multiplication  of  banks,  so  that  every  town 


CHECKS  AND  THEIR  COLLECTION  821 

and  hamlet  has  its  local  institution,  encouraging  people  to 
open  checking  accounts,  the  use  of  the  bank  check  has  be- 
come almost  as  common  as  the  use  of  paper  money.  With 
the  growing  use  of  checks  as  a  form  of  circulating  currency 
has  come  the  development  of  the  transit  department,  so  that 
everywhere  are  to  be  found  banks  featuring  their  collection 
service.  One  large  bank  in  Philadelphia  has  handled  over 
a  billion  dollars  in  its  transit  department  in  the  course  of  a 
single  year. 

It  is  estimated  that  twenty  years  ago  the  amount  out- 
standing in  the  form  of  collections  was  $25,000,000,  repre- 
senting 3,800  banks.  In  1902  4,600  banks  had  $50,000,000 
outstanding.  The  New  York  Federal  Reserve  Bank  in 
March,  1919,  was  handling  over  200,000  checks  a  day.  On 
December  5,  1920,  the  Federal  Reserve  Banks  had  in  the 
course  of  collection  checks  to  the  amount  of  $734,523,000. 

DEFECTS  IN  THE  PRESENT  SYSTEM 

But  in  spite  of  the  widespread  use  of  checks  and  their 
many  advantages  as  a  circulating  medium  (checks  being  the 
almost  perfect  medium  of  the  large  and  distant  payments, 
as  bank  notes  are  the  perfect  medium  of  the  small  and  local 
payments),  they  must  be  redeemed  in  money;  they  must 
be  paid  on  demand.  This  demand  often  takes  on  a  silent 
form  through  the  clearing-house,  and  a  "clearing-house  run" 
may  take  place,  as  disastrous  as  a  run  over  the  counter.  The 
bank  must  either  redeem  its  checks  in  money  or  suspend. 

The  trouble  with  the  American  currency  system  has 
been  that  heretofore  there  has  been  no  way  by  which  a  bank 
could  turn  its  assets  into  a  circulating  medium,  to  redeem 
the  checks  of  its  depositors  when  the  usual  reserve  proved 
inadequate.  The  banking  system  that  does  not  permit  the 
resources  of  the  bank  to  be  turned  into  circulating  credits  to 
redeem  check  obligations  is  vitally  defective.  The  de- 
posits being  payable  on  demand,  and  this  demand  taking 
the  form  of  bank  checks,  it  becomes  necessary  either  to 
carry  large  reserves  or  to  have  some  way  by  which  these 
demands  can  be  satisfied  by  the  issue  of  an  instrument  that 
will  freely  circulate  when  the  bank  check  proves  inadequate. 
In  other  words,  checks  must  be  redeemed  in  bank  notes, 
created  by  turning  commercial  paper  into  bank  notes;  for 
checks  being  of  non-uniform  denominations  and  unknown 


822  THE   PRACTICAL  WORK   OF   A   BANK 

outside  their  immediate  circle  can  only  pass  as  currency 
where  well  known  and  under  normal  conditions.  The  Fed- 
eral Reserve  System  will  make  this  possible  by  its  rediscount 
operations. 

CHECKS  DEFINED 

A  check  is  best  defined  as  "a  bill  of  exchange  drawn  on 
a  bank  and  payable  on  demand."  And  as  a  bill  of  exchange 
it  is  subject  to  all  the  laws  governing  bills  of  exchange. 
Commentators  on  the  laws  of  negotiable  instruments  usually 
give  but  little  space  to  checks,  treating  them  under  the  gen- 
eral classification  of  bills  of  exchange;  although  there  are 
peculiarities  surrounding  checks  that  do  not  attend  ordinary 
bills  of  exchange,  and  the  law  of  bank  checks  is  a  study  in 
itself. 

Like  bills  of  exchange,  checks  are  regarded  as  "Inland" 
and  "Foreign,"  depending  upon  whether  they  are  payable 
within  the  State  or  without.  But  for  practical  banking  pur- 
poses a  check  payable  outside  the  jurisdiction  of  the  local 
clearing-house,  or  outside  the  city  if  such  institution  does 
not  exist,  is  regarded  as  "foreign" — meaning  the  mails  and 
the  transit  department  must  be  used  to  make  the  collection 

BANK  CHECKS  Ci<AssmED 

Bank  checks  may  be  grouped  into  four  classes:  (a) 
Checks  drawn  on  the  bank  in  which  they  are  deposited  and 
which  come  in  over  the  counter  for  deposit  or  for  cashing, 
the  latter  consisting  largely  of  "counter  checks"  and  payroll 
checks — "own  checks";  (b)  checks  drawn  on  banks  in  the 
same  city  and  which  will  be  paid  through  the  clearing- 
house; (c)  checks  drawn  on  banks  in  the  same  city  which 
do  not  belong  to  the  clearing-house,  or  clear  through 
members,  and  which  must  be  presented  for  payment  by 
messengers.  These  are  not  numerous  even  in  a  large  city 
like  New  York,  most  banks  preferring  to  make  use  of 
the  clearing-house,  although  such  items  are  yet  considerably 
in  evidence;  (d)  foreign  checks,  consisting  of  checks  drawn 
on  other  points  and  which  must  be  collected  through  the 
mails.  The  latter  class  constitutes  the  "transit  items,"  and 
the  department  handling  these  items  is  called  the  "Transit 
Department,"  and  is  to  be  distinguished  from  the  "Collec- 
tion Department"  which  attempts  to  collect  time  and  other 


CHECKS  AND  THEIR  COLLECTION  326 

items.  The  collection  service  must  be  regarded  as  a  matter 
of  banking  courtesy  and  not  a  fundamental  element  in  bank- 
ing practice.  The  cost  of  running  a  well-conducted  collec- 
tion department  must  necessarily  be  large  and  the  fees  fre- 
quently all  too  small  to  recompense  the  bank;  but  it  has  be- 
come such  a  common  practice  to  deposit  all  notes,  drafts, 
certificates  of  deposit,  coupons,  etc.,  with  the  bank  for  col- 
lection and  credit  that  it  has  come  to  be  looked  upon  as  a 
part  of  the  bank's  regular  work  to  make  such  collections, 
frequently  without  charge,  although  some  banks  so  operate 
their  collection  department  that  a  profit  accrues  through  col- 
lection fees.  Some  transit  departments  are  run  at  an  ex- 
pected loss,  this  being  recompensed  through  the  profits  on 
deposits  attracted  by  transit  facilities  and  low  exchange 
rates. 

COMPENSATING  BALANCES 

Checks  are  generally  credited  as  cash,  although  in  the 
better  managed  banks  depositors  are  not  allowed  to  draw 
against  uncollected  funds.  This  is  provided  against  by  re- 
quiring a  balance  large  enough  to  cover  the  uncollected 
items.  Thus,  if  a  merchant  should  deposit  $5,000  daily 
and  carry  a  balance  of  $20,000,  allowing  three  days  for 
collection,  his  account  could  be  drawn  against  in  the  sum 
of  $5,000  daily  without  drawing  upon  outstanding  items; 
his  checks  of  one  day  offsetting  the  collections  of  the  same 
day. 

Where  checks  are  credited  at  par,  it  is  generally  required 
that  a  compensating  balance  be  carried.  By  compensating 
balance  is  meant  a  reciprocal  arrangement  by  which  a  de- 
positor (bank  or  individual)  agrees  to  keep  a  certain  bal- 
ance free  of  interest  as  compensation  to  the  bank  for  the  loss 
which  will  accrue  on  collections.  Thus,  a  bank  in  the  Middle 
West  might  agree  to  keep  with  its  New  York  correspondent 
a  balance  of  $10,000  without  interest;  in  return  for  which  it 
would  receive,  say,  $25,000  of  transit  items  a  month  for  col- 
lection at  an  agreed  rate,  the  New  York  bank,  of  course, 
paying  the  charges  which  it  might  or  might  not  collect  from 
its  depositors.  The  profit  to  the  Western  bank  lies  in  the 
exchange  charges  which  it  will  deduct  when  remitting  to  its 
New  York  correspondent,  which  would  probably  be  more 
than  the  interest  on  the  $10,000.  Likewise  if  a  bank  in 


824  THE    PRACTICAL   WORK   OF    A    BANK 

Albany  sends  to  Philadelphia  items  on  which  the  Philadel- 
phia bank  loses,  say,  $10  a  month,  but  earns  $20  in  in- 
terest on  the  balance  of  the  Albany  bank  with  it,  it  is  a  de- 
sirable connection.  The  analysis  department  must  see  that 
the  balance  is  maintained  as  agreed. 

THE  COUNTRY  BANKER  AND  His  CITY  CORRESPONDENT 

The  country  banker  uses  his  reserve  agent  both  as  re- 
serve agent  and  as  collecting  agent,  depositing  his  items 
both  for  credit  and  collection,  the  items  so  sent  the  reserve 
agent  as  soon  as  credited  becoming  part  of  his  lawful  re- 
serve. In  the  Federal  Reserve  System  the  item  becomes 
reserve  as  soon  as  it  is  mailed.  As  soon  as  the  letter  is 
dispatched  the  country  banker,  therefore,  regards  the 
amount  as  added  to  his  balance,  unless  other  arrangements 
are  made.  The  reserves  that  are  so  constituted. are  not  re- 
serves, but  simply  items  in  course  of  collection.  In  the  ag- 
gregate the  total  is  enormous.  It  is  much  more  satisfac- 
tory to  the  country  banker  to  send  all  items  to  his  reserve 
agent  in  bulk  than  to  attempt  collection  himself.  It  is 
cheaper  and  involves  much  less  labor. 

The  transition  that  has  been  taking  place  in  the  collec- 
tion of  checks  is  well  illustrated  by  the  experiences  of  a 
country  bank  in  New  York  State.  In  the  early  nineties  it 
acted  as  collecting  agent  for  a  number  of  New  York  banks, 
and  daily  received  a  large  number  of  items  on  surrounding 
places,  which  it  sent  direct  to  the  drawee  banks,  receiving 
payment  either  daily,  weekly  or  semi-monthly,  but  remit- 
ting to  the  New  York  banks  daily.  In  the  course  of  time  an 
aggressive  campaign  was  waged  by  a  bank  in  a  reserve  city 
for  reserve  accounts  and  by  the  volume  of  its  business  was 
enabled  to  quote  most  favorable  terms.  The  result  has  been 
that  the  first  mentioned  bank  no  longer  collects  for  the 
surrounding  territory,  but  sends  all  its  checks  in  one  letter  to 
the  reserve  city  bank.  The  latter  now  gathers  to  itself  prac- 
tically every  check  for  a  hundred  miles  around,  and  has 
made  a  feature  of  its  collection  service  and  favorable  terms. 

To  such  a  marked  extent  has  this  process  been  going  on, 
that  in  Chicago  one  of  the  larg-est  banks  employing  from 
600  to  700  men  utilizes  one-third  of  its  force  in  its  collection 
department. 


CHECKS  AND   THEIR  COLLECTION  »«5 

There  are  certain  cities  which  have  specialized  in  collec- 
tions and  have  become  transit  centers.  Large  and  progres- 
sive banks  in  these  cities  have  well  organized  transit  depart- 
ments, and  by  the  breadth  of  scope  and  efficiency  of  service, 
and  cheapness,  have  made  their  collections  a  feature.  Al- 
bany, N.  Y.,  is  one;  Chicago  is  another;  Boston  has  become 
the  center  of  New  England  collections;  Philadelphia  has 
taken  a  prominent  place  as  a  transit  center  by  virtue  of  its 
liberal  collection  arrangements:  Kansas  City,  by  reason  of 
its  efficient  clearing-house,  has  taken  front  rank  as  a  col- 
lection center  for  a  large  territory;  Baltimore  and  New 
Orleans  are  likewise  important  points.* 

THE  JOURNEY  OF  A  BANK  CHECK 
Inasmuch  as  a  check  is  not  money  but  merely  an  order 
to  pay  money,  it  should  be  sent  home  for  redemption  in 
money  by  the  shortest  route  and  in  the  quickest  time.  Its 
quick  redemption  is  the  chief  concern,  and  because  of  its 
short  life  it  is,  under  ordinary  conditions,  an  ideal  currency. 
It  expands  and  contracts  as  the  needs  of  business  require. 
If  business  is  slack,  the  number  of  checks  will  be  materially 
less,  and  likewise  the  volume. 

As  a  matter  of  fairness  and  good  business  policy,  the 
banker  is  under  obligation  to  reduce  checks  received  from  his 
depositors  to  available  funds  just  as  quickly  as  possible. 
Under  the  present  system  of  collecting  these  items,  bankers 
often  resort  to  circuitous  routing  to  evade  high  collection 
charges.  Mr.  Cannon  in  his  work  on  clearing-houses  gives 
this  example:  A  check  on  Sag  Harbor,  N.  Y.,  deposited  in 
Hoboken,  N.  J.,  went  from  Hoboken  to  New  York,  New 
York  to  Boston,  Boston  to  Tonawanda,  Tonawanda  to 
Albany,  Albany  to  Port  Jefferson,  Port  Jefferson  to  Far 
Rockaway,  Far  Rockaway  to  New  York  again,  New  York 
to  Riverhead,  Riverhead  to  Brooklyn,  and  finally  from 
Brooklyn  to  Sag  Harbor.  Had  it  gone  direct,  it  would 
have  saved  fifteen  hundred  miles  in  travel  and  the  handling 
by  nine  different  banks. 

Any  indirect  routing  of  checks  to  save  exchange  charges 
takes  them  out  of  their  natural  channel — sends  them  home 
by  the  longest  route  to  avoid  the  cost  of  the  ticket  by  the 
shortest  way.  A  large  department  store  in  New  York  does 

*The  Federal  Reserve  Banks  are  now  fast  becoming  the  chief  check  collecting 
institutions  of  the  country. 


826  THE   PRACTICAL  WORK  OF   A   BANK 

its  banking  in  Philadelphia.  This  might  be  due  to  several 
reasons,  either  a  desire  on  the  part  of  the  merchant  to  build 
up  the  business  of  his  own  bank,  or  to  save  the  cost  of  ex- 
change, which  in  New  York  he  would  have  to  pay  and 
which  in  Philadelphia  he  may  escape  by  reason  of  the 
clearing-house  rules  regarding  collections. 

THE  TRANSIT  DEPARTMENT 

The  transit  department  is  a  department  of  labor.  The 
mill  grinds  continually.  Every  day  is  a  busy  day,  as  was 
the  day  before.  It  is  a  good  barometer.  When  business  is 
brisk,  the  transit  items  will  be  heavy;  when  slack,  the  work 
will  be  lighter.  The  stationery,  postage,  clerk  hire,  etc.,  an- 
nually amount  to  a  goodly  sum,  and  the  problem  is  to 
make  the  department  show  a  profit  by  charging  for  the  ser- 
vice more  than  the  service  costs.  This  is  the  problem  of 
exchange.  Some  banks  work  on  the  theory  that  they  can 
afford  to  collect  all  checks  gratis,  provided  a  balance  free 
of  interest  is  carried  large  enough  to  provide  a  profit. 
Others,  by  clearing-house  rules,  must  charge  set  fees. 

The  total  of  the  items  sent  out  each  night  (nothing  is 
held  over)  is  charged  to  "transit  account"  in  the  general 
ledger  (the  individual  banks  having  been  charged  with  the 
various  amounts)  and  when  returns  are  received  they  are 
credited.  The  bank  knows,  therefore,  how  much  is  out- 
standing all  the  time  in  the  mails. 

An  exchange  account  is  also  opened,  to  which  the  ex- 
change it  receives  is  credited  and  to  which  is  charged  the 
exchange  paid  for  collections.  This  measures  the  profit  or 
loss  of  the  transit  department,  as  this  is  the  only  source  of 
profit  the  transit  department  can  show.  There  is,  of  course, 
the  profit  indirectly  earned  through  the  ability  of  the  bank 
to  make  cheap  collections  and,  therefore,  attract  large  re- 
ciprocal accounts. 

The  term  "transit  item"  is  used  to  designate  those  items 
which  are  sent  by  banks  to  other  banks  for  collection  and 
credit,  or  collection  and  remittance,  and  which  have  been 
received  as  cash  by  the  bank,  as  distinguished  from  the  items 
received  for  collection  which  are  not  entered  as  cash  and 
will  not  be  until  returns  are  received. 

They  may  also  be  known  as  "foreign  items"  as  distin- 
guished from  "city  items."  But  whatever  the  term,  the 


CHECKS  AND  THEIR  COLLECTION  827 

proposition  is  the  same ;  that  is,  to  turn  the  item  into  money 
or  its  acceptable  substitute,  a  draft  on  the  nearest  reserve 
city,  as  soon  as  possible.  In  order  to  do  this,  banks  have 
correspondents  in  all  parts  of  the  country,  which  collect 
items  in  a  certain  territory,  and  maintain  reciprocal  ar- 
rangements with  each  other.  If  the  bank  has  no  correspond- 
ent it  selects  one  for  the  purpose.  But  large  banks  cover 
the  country  so  generally  with  correspondents  that  it  is  not 
usual  to  have  an  item  that  cannot  be  collected  quickly 
through  the  regular  channel,  unless  there  be  some  special 
need  for  hurry.  This,  of  course,  necessitates  indirect  rout- 
ing and,  therefore,  delay,  and  the  problem  of  banking  to-day 
is  to  get  these  items  collected  in  the  shortest  time  at  the 
least  expense. 

In  building  up  a  transit  system,  the  bank  makes  an 
agreement  with  its  correspondent  to  do  this  collecting  for  a 
stated  rate  of  exchange  charge,  remitting  as  may  be  agreed 
upon;  or  there  may  be  a  mutual  agreement,  that  in  return 
for  a  balance  maintained  with  it,  the  depositaiy  bank  will 
send  all  items  in  a  certain  territory  at  an  agreed  rate  of  ex- 
change as  aforesaid.  It  is  a  case  of  one  serving  the  other. 
We  are  now  more  concerned  with  the  machinery  than  the 
terms  of  collection,  but  the  test  of  a  good  transit  man  is  his 
ability  to  make  satisfactory  connections  that  will  result  in 
profitable  business  in  the  transit  department.  In  order  to 
know  where  an  item  should  go,  should  there  be  any  doubt, 
there  is  kept  a  card  record  of  correspondents,  terms,  aver- 
age balance,  etc.,  for  use  in  routing  checks. 

A  bank  with  wide  connections  will,  therefore,  receive  a 
large  number  of  transit  items  for  collection  in  its  territory. 
Thus  a  bank  in  Albany  might  collect  checks  for  all  New 
York  State,  on  agreement  with  a  bank  in  San  Francisco. 
And  all  the  New  York  State  items  of  the  San  Francisco 
bank  would  go  to  the  Albany  bank  and  from  there  be  sent 
out  to  its  correspondents  all  over  New  York  State.  If  it  had 
no  correspondent  in,  let  us  say,  Watertown,  it  would  send 
the  item  to  Syracuse  or  Oswego,  the  nearest  point  where 
it  had  a  correspondent.  It  is  obvious  that  the  transit  man 
must  know  the  map. 

The  Albany  bank  would  credit  the  amount  received  and 
allow  its  San  Francisco  correspondent  to  check  on  it,  or 
remit  to  New  York  for  credit  of  the  San  Francisco  bank, 

32 


828  THE   PRACTICAL  WORK  OF   A   BANK 

the  most  likely  course.  Conversely,  the  Albany  bank  would 
send  all  its  California  items  to  the  San  Francisco  bank  for 
collection  and  remittance,  and  would  receive  in  return  the 
San  Francisco  bank's  draft  on  New  York.  Payment  in 
both  cases  would  be  made  through  New  York  (in  New 
York  funds)  . 

COLLECTION  OF  BANK  CHECKS 

Transit  items  may  be  collected  in  two  ways:  Direct, 
using  correspondent  banks  as  collecting  agencies  ;  or  through 
the  medium  of  the  clearing-house.  The  clearing-house  sys- 
tem of  collection  contemplates  dividing  the  country  into 
zones,  each  zone  to  have  as  its  focal  point  the  reserve  city  of 
that  zone.  To  collect  an  item,  a  bank  would  send  it  to  the 
correspondent  nearest  the  clearing-house  in  the  reserve  city 
that  acted  as  the  zone  center  for  that  district.  The  only 
additional  machinery  needed  is  the  machinery  in  the  clear- 
ing-house at  the  zone  center.  This  system  is  best  illustrated 
by  a  brief  description  of  several  clearing-house  systems  of 
clearing  checks. 

The  Boston  Clearing-House  collects  checks  on  all  New 
England  points.  The  scheme  adopted  in  1899-1900  was 
that  of  a  clearing-house  foreign  department  —  a  country 
clearing-house  —  which  should  clear  New  England  checks. 
Each  bank,  instead  of  mailing  individual  letters  daily  to  its 
suburban  correspondents,  "lumps"  its  country  checks  and 
sends  them  to  the  clearing-house,  where  they  are  re-sorted 
and  sent  by  the  clearing-house  to  the  banks  on  which  they 
are  drawn.  Settlement  is  made  through  the  regular  clear- 
ing-house in  two  days,  the  time  required  for  collection.1 

As  to  the  practical  results  of  the  Boston  system,  Charles 
A.  Ruggles,  manager  of  the  Boston  Clearing-House,  states  : 
"The  introduction  of  what  we  term  our  foreign  department, 
for  the  collection  of  checks  in  New  England,  has  worked  a 
revolution  in  the  transit  department.  It  has  reduced  the 
cost  of  collection  to  seven  cents  per  thousand  dollars;  nine- 
ty-five per  cent,  of  the  collections  are  received  within  forty- 
eight  hours.  The  system  is  entirely  satisfactory  as  far  as  we 
can  learn  to  both  the  city  and  the  country  banks." 


Clearing  House  Chapter  for  more  detailed  description  of  the  Boston 
Clearing  Plan.  (Since  the  opening  of  the  Federal  Reserve  System,  the  collection 
of  country  checks  in  New  England  is  now  performed  through  the  Federal  Reserve 
Bank  of  Boston.) 


CHECKS  AND  THEIR  COLLECTION  829 

The  Atlanta  system  of  collecting  transit  items  through 
the  clearing-house  was  established  in  May,  1909,  and  is  col- 
lecting transit  items  on  Georgia,  Florida,  Louisiana,  Missis- 
sippi, Tennessee  and  Alabama.  Mr.  J.  G.  Lester,  manager 
of  the  transit  department  of  the  Atlanta  Clearing-House, 
says:  "We  have  found  that  the  plan  works  admirably.  I 
have  found  that  it  paid  on  three  grounds;  first,  in  clerical 
expenses;  second,  in  postage  and  stationery;  and  third,  by 
reason  of  consolidated  business  we  get  a  cheaper  rate  of  ex- 
change. Then,  too,  our  transit  department  having  nothing 
else  to  look  after,  gets  more  prompt  returns  and  more 
satisfactory  service." 

The  Kansas  City  system  of  collecting  through  the 
clearing-house  was  installed  during  1905,  and  collects  from 
territory  covering  682,810  square  miles,  which  comprises 
this  large  middle  Western  section,  including  seven  States — 
Colorado,  Kansas,  Missouri,  New  Mexico,  Oklahoma,  Texas 
and  southern  Nebraska.1  This  clearing-house  covers  three 
and  one-half  times  as  much  territory  as  the  States  of  Penn- 
sylvania, New  York,  Ohio  and  Illinois,  combined,  and  has 
5,600  banks  in  its  district.  As  to  the  practical  results  at- 
tained by  the  Kansas  City  Clearing-House,  Mr.  Jerome 
Thralls,  late  of  the  Kansas  City  Clearing-House,  said: 
"The  operation  of  our  country  clearing-house  has  reduced 
the  cost  of  handling  cash  items  in  the  territory  covered  by 
that  department,  over  sixty  per  cent.  The  average  time  re- 
quired for  returns  has  been  reduced  in  parts  of  that  terri- 
tory, over  fifty  per  cent.,  and  in  the  whole  territory  a  re- 
duction of  probably  twenty-five  per  cent.  We  know  from 
our  own  experience  that  the  plan  is  a  good  one  and  will 
work  satisfactorily  in  any  city  where  there  is  sufficient  vol- 
ume of  country  business  to  justify  the  establishment  of  such 
a  department." 

The  Kansas  City  Country  Clearing-House  does  not  in- 
terfere with  the  arrangements  of  the  individual  banks,  where 
these  are  more  profitable.  As  it  charges  a  uniform  exchange 
rate  of  one-tenth  of  one  per  cent.,  which  had  previously 
averaged  twenty-five  to  thirty  cents  per  $100,  it  follows  that 
there  are  few  cases  where  it  does  not  pay  to  make  use  of  the 
clearing-house. 

1  These  collections  are  now  handled  by  the  Federal  Reserve  Bank. 


880  THE    PRACTICAL  WORK   OF   A   BANK 

In  New  England  country  merchants  who  used  to  allow 
from  two  to  six  days  for  the  return  of  their  checks  must 
now  be  prepared  to  meet  them  in  forty-eight  hours.  Similar 
results  have  been  obtained  in  Atlanta  and  other  places.  Any 
system  that  will  so  quickly  reduce  a  deposit  to  available 
funds  is  of  inestimable  value,  not  only  to  the  depositor,  but 
to  our  banking  system  in  general. 

EXCHANGE  CHARGES 

It  was  only  about  twenty  years  ago  that  the  custom 
among  banks  was  to  receive  checks  and  other  items  for  col- 
lection only,  crediting  the  proceeds  when  collected.  The 
strife  for  reserve  accounts  led  the  city  banks  to  accept  and 
credit  these  items  at  par.  The  check  had  not  yet  received 
its  growth  as  a  national  currency,  the  collection  charges 
were  not  a  burden,  and  the  number  of  items  relatively  small 
The  city  bank  then  began  paying  exchange  to  the  country 
bank,  and  collected  the  whole  country  at  par.  The  country 
bank,  therefore,  did  not  pay  exchange,  but  received  it.  So 
great  did  the  problem  become  that  clearing-houses  took  the 
matter  up  and  passed  stringent  rules  regarding  collection 
of  checks,  placing  a  minimum  rate  on  certain  points,  with 
discretionary  charges  on  others,  the  result  of  which  was  to 
shift  the  burden  to  the  last  holder  of  the  check. 

The  growth  of  banks  in  number  has  brought  about  the 
growing  use  of  country  checks,  so  that  they  now  pass 
through  the  banks  by  the  hundred  thousand.  The  volume 
of  business  in  this  country  is  upwards  of  four  hundred  and 
fifty  thousand  million  dollars  yearly,  and  by  the  rule  that 
fully  ninety  per  cent,  of  the  business  is  done  by  check,  it 
will  be  seen  that  these  instruments  play  a  vital  part  in  the 
commercial  transactions  of  the  country. 

The  ideal  arrangement  would  be  to  have  all  checks  cir- 
culate at  par.  But  the  country  banker  has  become  so  wedded 
to  his  exchange  profits  (in  some  banks  enough  to  pay  part 
of  the  salaries  and  sometimes  the  dividends)  that  he  steadily 
opposes  any  change  that  will  deprive  him  of  these  profits, 
or  any  part  of  them,  which  are  easily  made  and  sure.  To 
avoid  the  collection  charge,  indirect  routing  is  resorted  to, 
and  instead  of  a  check  going  by  the  shortest  route  it  often 
goes  by  the  longest,  as  has  been  illustrated. 

Theoretically,  the  charge  made  by  the  country  banker 


CHECKS  AND  THEIR  COLLECTION  381 

should  only  be  sufficient  to  cover  the  expense  of  creating 
and  maintaining  a  credit  balance  in  the  reserve  city  on 
which  he  draws.  This  expense  would,  in  reality,  never  ex- 
ceed the  cost  of  shipping  currency  to  that  city.  Now  the 
city  banker  pays  the  charge  of  the  country  banker,  which 
charge  to-day  includes  not  only  the  cost  of  maintaining  the 
balance  in  the  reserve  city,  but  a  profit  to  the  country  bank- 
er as  well.  But  to  the  country  banker  in  most  cases  the 
cost  of  maintaining  a  credit  balance  in  his  reserve  city  is 
nothing,  for  his  reserve  bank  in  that  city  often  not  only  col- 
lects the  world  for  him  at  par,  but  also  pays  him  interest 
on  his  balance.  Thus  we  have  the  fallacy  of  the  city  banker 
paying  the  country  banker  for  the  exchange  the  city  banker 
provides  the  country  banker  without  cost.  The  city  banker 
has  the  right  to  adopt  any  system  that  will  relieve  him  of 
this  injustice  provided  he  does  not  merely  shift  the  burden 
to  another.2 

Everybody  tries  to  avoid  the  exchange  charge.  The  mer- 
chant in  the  small  town  pays  his  bills  by  his  check.  The 
merchant  in  the  larger  place  accepts  it  rather  than  lose  a 
customer  or  invite  controversy.  The  merchant  in  the  small- 
er town  could  get  a  New  York  draft,  but  that  would  involve 
expense.  The  city  dealer  endeavors  to  shift  the  burden  on 
the  bank,  and  some  banks  stand  it  and  even  invite  it.  The 
city  bank  then  tries  to  shift  the  burden  by  transit  arrange- 
ments, and  accepts  the  loss  only  in  the  hope  that  it  may  in- 
directly regain  it.  Thus  items  frequently  pass  through  the 
place  of  payment  two  or  three  times  because  of  this  dodging 
of  expense. 

The  solution  would  seem  to  be  through  the  clearing- 
house, for  if  it  will  operate  in  Kansas  City,  it  will  operate 
on  a  larger  scale  for  the  whole  country.  Clearing-house 
collection  reduces  the  cost  from  one-half  to  two-thirds.  This 
has  been  demonstrated.  It  does  not  deprive  the  country 
bank  of  its  profits,  and  will  work  a  saving  in  postage,  labor 
and  time  to  compensate  for  the  loss  by  reason  of  cheaper 
rates.  It  is  just  and  reasonable.  The  contrast  between  in- 
dividual collection  and  clearing-house  collection  is  apparent. 

Under  the  present  system  each  day  the  country  banker 
receives  a  letter  containing  checks  on  him  from  each  of 

*A.  E.  Eyler,  Union  National  Bank  of  Pittsburgh,  in  Pittsburgh-Cincinnati 
Debate  of  American  Institute  of  Banking. 


382  THE   PRACTICAL  WORK  OF   A  BANK 

fifteen  or  twenty  banks  in  a  city.  In  remitting  for  these 
items  he  sends  a  draft  to  each  bank  that  sent  him  a  pack- 
age of  checks.  Each  remittance  costs  him  the  stamps,  an 
envelope,  a  letter  head,  a  draft,  and  his  clerk's  time  in  han- 
dling the  transaction.  This  is  a  fixed  cost  irrespective  of 
the  size  of  the  remittance,  so  the  charge  on  even  the  smallest 
remittance  he  makes  must  be  at  least  sufficient  to  cover 
this  cost.  Under  the  clearing-house  system  the  country 
banker  will  receive  each  day,  from  the  clearing-house  in  the 
city,  one  letter,  containing  all  the  items  drawn  on  his  bank. 
In  remitting  for  these  he  will  use  one  letter  head,  one  draft, 
one  envelope,  and  one  stamp,  instead  of  from  fifteen  to 
twenty  of  each,  as  at  present.  The  saving  in  these  items  and 
in  clerk  hire  will  certainly  be  to  the  advantage  of  the  coun- 
try banker  and,  in  all  fairness,  he  should  reduce  his  charges 
for  making  remittances. 

It  will  inflict  no  injustice  on  the  country  banker  as  the 
only  reduction  in  his  charges  will  be  proportionate  to  the 
reduction  in  his  expenses  for  making  remittances.  He  ought 
to  make  this  reduction,  for  any  bank  is  in  honor  bound  to 
serve  its  customers  at  a  rate  consistent  with  justice  and  fair 
dealing.  A  bank  is  an  agent  of  society  to  add  to  its  wel- 
fare; not  to  hinder  it.  Any  bank  that  must  maintain  itself 
by  exorbitant  charges  for  its  services  has  no  warrant  for  its 
existence. 

The  problem  of  the  collection  charge  is  not  only  to  re- 
duce it,  but  to  place  it  where  it  belongs.  As  now  obtains,  the 
charge  falls  upon  the  last  holder,  who  cannot  escape  paying 
the  tax.  The  drawee  bank  most  assuredly  deducts  the  ex- 
change charges  from  its  remittance,  and  it  is  easier  to  place 
the  burden  upon  the  man  who  deposits  the  item  in  a  bank 
than  to  collect  from  the  drawer.  The  proper  place  for  the 
levy  of  the  tax  would,  therefore,  seem  to  be  from  the  man 
most  accommodated,  namely  the  drawer.  His  banking  priv- 
ileges are  worth  something  to  him.  The  benefits  of  a  bank 
account  are  not  only  worth  the  loss  of  interest,  but  the 
checking  privilege  is  worth  a  small  charge.  But  by  com- 
mon consent  the  tax  has  been  imposed  upon  the  last  holder, 
leaving  it  to  him  to  make  the  adjustment  in  his  prices,  or 
taking  the  loss  as  an  expense  incident  to  doing  business. 

It  is  anticipated  and  hoped  for  in  many  quarters  that 
eventually  the  Federal  Reserve  Banks  will  take  over  a  large 


CHECKS   AND   THEIR   COLLECTION  888 

part  of  the  collection  of  transit  items  for  the  whole  country 
on  a  basis  fair  to  all  the  interests  involved.  The  Fed- 
eral Reserve  Act  empowers  the  Federal  Banks  to  "receive 
on  deposit  at  par  from  member  banks  or  from  Federal 
Reserve  Banks  checks  and  drafts  drawn  upon  any  of  its  de- 
positors, and  when  remitted  by  a  Federal  Reserve  Bank, 
checks  and  drafts  drawn  by  any  depositor  in  any  other  Fed- 
eral Reserve  Bank  or  member  bank  upon  funds  to  the  credit 
of  said  depositor  in  said  reserve  bank  or  member  bank. 
Nothing  herein  contained  shall  be  construed  as  prohibiting  a 
member  bank  from  charging  its  actual  expense  incurred  in 
collecting  and  remitting  funds,  or  for  exchange  sold  to  its 
patrons.  The  Federal  Reserve  Board  shall,  by  rule,  fix  the 
charges  to  be  collected  by  the  member  banks  from  its  patrons 
whose  checks  are  cleared  through  the  Federal  Reserve  Bank 
and  the  charge  which  may  be  imposed  for  the  service  of 
clearing  or  collection  rendered  by  the  Federal  Reserve  Bank. 
The  Federal  Reserve  Board  shall  make  and  promulgate 
from  time  to  time  regulations  governing  the  transfer  of 
funds  and  charges  therefor  among  Federal  Reserve  Banks 
and  their  branches,  and  may  at  its  discretion  exercise  the 
functions  of  a  clearing-house  for  such  Federal  Reserve 
Banks,  or  may  designate  a  Federal  Reserve  Bank  to  exer- 
cise such  functions,  and  may  also  require  each  such  bank  to 
exercise  the  functions  of  a  clearing-house  for  its  member 
banks." 

It  will  thus  be  seen  that  the  intent  is  not  to  collect  at 
par;  but  at  the  cost  of  collecting,  and  this  is  as  it  should  be. 
The  costs  of  collecting  a  check  cannot  be  avoided,  and  these 
incidental  expenses  should  be  borne  by  those  most  benefited ; 
but  what  arrangements  will  be  made  in  this  respect  cannot 
at  this  writing  be  stated.  But  the  intent  of  the  law  being 
plain,  and  the  necessity  being  acknowledged,  no  doubt  the 
Federal  Board  will  evolve  a  plan  that  will  meet  the  approval 
of  the  country  as  well  as  the  city  banker.8 

'Since  June  15,  1918,  checks  have  been  collected  by  the  Federal  Reserve 
Banks  without  charge,  provided  the  checks  are  drawn  on  institutions  that  remit 
at  par,  which  list  is  furnished  from  time  to  time  by  the  various  Federal  Reserve 
Banks.  It  is  believed  that  banks  on  the  par  list  will  ultimately  represent  95  per 
cent  of  the  volume  of  checks  in  circulation. 

The  Federal  Reserve  Banks  also  make  free  telegraphic  transfer  from  the 
various  Federal  Reserve  Banks  and  their  branches,  having  private  wires  for  this 
purpose.  Thus,  a  check  drawn  on  Kansas  City  and  deposited  in  New  York  would 
be  sent  direct  to  Kansas  City,  and  if  it  was  desired  that  it  be  credited  in  San 
Francisco,  the  Kansas  City  Bank  would  immediately,  upon  payment,  telegraph 


884 


THE   PRACTICAL  WORK  OF  A  BANK 

THE  NUMERICAL  TRANSIT  SYSTEM 


The  greatest  development  that  has  attended  transits  and 
collections  in  recent  years  is  the  Numerical  Transit  System, 
which  has  been  in  operation  for  about  ten  years.  The  plan 


TRANSIT  ADDIKO  MACHINE,  BUILT  SPECIALLY  FOR  TRANSIT  WORK,  USING  THE  NUMERICAL 

TRANSIT  SYSTEM 
By  courtesy  Burroughs  Adding  Machine  Co.,  Detroit,  Mich. 

the  amount  to  San  Francisco,  a  very  obvious  saving  of  time.  Wire  advices  are 
also  made  directly  between  the  various  Federal  Reserve  Banks.  In  the  New 
York  Bank,  checks  drawn  on  banks  in  New  York  City  and  received  by  9  A.  M. 
are  immediately  credited  at  par.  For  other  checks,  immediate  credit  is  given  at 
par,  but  cannot  be  drawn  against  until  the  period  has  elapsed  according  to  a 
time  schedule.  This  schedule  is  based  on  mail  time  for  the  item  to  reach  the 
paying  bank  plus  the  mail  time  required  for  the  paying  bank  to  remit  to  the 
Federal  Reserve  Bank  of  the  district.  The  country  is  divided  into  four  districts, 
or  divisions,  1 — 2 — 4 — 8  days.  In  the  New  York  Federal  Reserve  Bank  the  items 
are  sorted  on  the  remittance  list  in  the  following  classifications: 

1.  Items  drawn  on  New  York  Clearing  House  members. 

2.  Items  drawn  on  banks  in  Manhattan. 

3.  Items  drawn  on  one-day  points. 

4.  Items  drawn  on  two-day  points. 

5.  Items  drawn  on  four-day  points. 

6.  Items  drawn  on  eight-day  points. 

Banks  in  the  New  York  district  are  requested  to  use  the  skeleton  figure  "2" 
on  the  face  of  their  checks  to  indicate  that  they  belong  to  the  Second  Federal 
Reserve  District,  (March,  1919.) 


CHECKS  AND  THEIR  COLLECTION  885 

simply  designates  places  and  banks  by  numbers  instead  of 
names.  Thus,  instead  of  referring  to  the  National  City 
Bank  of  New  York  as  such,  either  in  correspondence  or  in 
conversation,  the  numerals  "1-8"  are  sufficient;  meaning  city 
No.  1,  New  York,  and  bank  No.  8  in  the  clearing-house, 
which  is  the  National  City  Bank.  Thus,  for  every  bank 
there  is  a  number,  and  in  listing  checks  the  number  which  is 
on  the  face  usually  following  the  name  is  all  that  is  neces- 
sary to  designate  the  city  and  the  bank. 

Banks  have  readily  taken  to  the  idea  as  a  time  saver, 
and  it  is  fast  replacing  the  use  of  names.  The  saving  in 
time  can  readily  be  seen  when  to  indicate  the  "Continental 
and  Commercial  National  Bank  of  Chicago,"  two  numerals 
are  all  that  is  necessary.  The  system  of  numbering  was 
carefully  designed  by  a  committee  of  transit  men  represent- 
ing the  American  Bankers  Association  and  is  as  follows: 

Numbers  from  one  to  forty-nine,  inclusive,  are  used  to 
designate  the  reserve  cities,  each  city  being  provided  with  a 
number  of  its  own  to  be  used  as  a  prefix  in  numbering  the 
banks  in  these  cities.  The  clearing-house  numbers  in  each  of 
the  cities  are  used  to  designate  the  clearing-house  banks  and 
additional  numbers  provided  for  banks  which  have  no  clear- 
ing-house numbers.  Numbers  from  fifty  to  ninety-nine,  in- 
clusive, are  used  to  designate  States.  The  State  numbers 
are  used  as  a  prefix  for  numbering  banks  which  are  located 
outside  of  the  forty-nine  cities  already  provided  for.  In 
numbering  the  reserve  cities  Brooklyn  is  included  with  New 
York  City;  Kansas  City,  Kans.,  with  Kansas  City,  Mo.,  and 
South  Omaha  with  Omaha.  As  there  are  fifty  reserve  cities 
this  left  two  numbers  not  used.  These  numbers  have  been 
given  Buffalo  and  Memphis.  Buffalo  was  selected  because 
it  is  the  tenth  city  in  population  and  by  giving  Buffalo  a 
number  of  its  own  the  clearing-house  numbers  can  be  used 
for  Rochester,  whose  population  is  218,000,  the  next  largest 
city  in  the  State.  Memphis  was  selected  owing  to  the  scar- 
city of  reserve  cities  in  the  South  and  on  account  of  its  im- 
portance as  a  collecting  center  and  also  to  permit  the  use 
of  clearing-house  numbers  for  Nashville  with  a  population 
of  110,000,  the  next  largest  city  in  the  State  and  which  is 
also  an  important  collecting  center. 

The  forty-nine  cities  have  been  numbered,  according  to 
population  as  shown  by  the  census  of  1910,  so  that  the  larg- 


386 


THE    PRACTICAL   WORK   OF   A   BANK 


e-5 
CLEVELAND  NATIONAL  BANK 


est  cities  have  the  small  numbers.  This  plan  reduces  the 
labor  of  registering  items  in  the  transit  department  to  a 
minimum  as  a  large  proportion  of  items  are  drawn  on  these 
cities.  For  example,  a  certain  New  York  bank  may  be  des- 
ignated 1-8,  a  Chicago  bank  2-1,  a  Philadelphia  bank  3-39. 

Thus  every  bank  in  the 
United  States  is  as- 
signed  a  distinctive 
number,  the  prefiix  de- 
noting the  geographical 
location  and  the  second 
or  affix  number  denot- 
ing the  name  of  the 
bank.  These  numbers, 
read  directly  from  the 
face  of  the  check  or  en- 
dorsement stamp,  are 
substituted  for  names 
and  addresses  in  mak- 
ing transit  or  other  rec- 
ords. The  extent  to 
which  the  numbers  may 
thus  be  used  is  a  mat- 
ter for  each  individual 
bank  to  determine  for 
i  t  s  el  f  ,  in  accordance 
with  its  accounting  sys- 
tem. It  is  imperative, 
however,  that  all  checks, 
drafts  and  endorsement 
stamps  should  show  the 
numbers  so  that  every 
bank  that  cares  to  do  so 
can  make  use  of  this 
time  and  labor-saving 
system.  It  is  obvious 
that  every  banker  would  wish  to  have  his  checks  in  such  form 
that  they  may  be  conveniently  handled  by  all  other  banks 
and  it  is  expected  that  within  a  very  short  time  every  check 
in  circulation  will  show  the  transit  number  of  the  paying 
bank. 

By  the  use  of  individual  numbers  for  the  forty-nine  cities 


We  mclow  the  followrn.  CASH  iua*.- 

IMDOWfl.                          M*M                                              AlKMIMf                   M.MO..M. 

6         19656     694 

0.5  X) 

4O     56     694 

156 

6         19 

56     7O3 

150 

5            2 

68                            1 

5X30 

5             2 

69 

ijOO 

5             S 

69 

2X10 

5             2 

69 

4.10 

5             2 

69 

703 

5           2 

69 

9X50 

5           2 

69 

5.85 

5        52 

8            9 

2.17 

5        16 

6O 

4 

908 

8        1 

6O 

3 

736 

56        9 

68' 

2X30 

7 

5.74  •     * 

7 

5.74 

4 

601 

8                  1 

2.46 

8 

60 

3               1 

438»/UTt 

8 

60 

0 

323 

5 

60 

I  o 

1.60 

1  5 

6O 

5 

38 

2 

69 

toa 

21 

6O 

8 

6OO 

2 

60 

3 

9OO 

8 

60 

5.73»-n» 

8 

69 

725 

8 

601 

0 

3B01"-'*' 

3 

60 

9 

850 

69 

127 

69 

728 

2 

69 

338 

2 

60 

8 

991 

60 

8                      534. 

60 

4                      2i4 

2 

601 

2                     625 

L368.860     » 

•  ii      l  i         in                  mm-     ~ 

A   TRANSIT   LETTER    MADE    ON    A    BURROUGHS 
TRANSIT    MACHINE 

Courtesy  Burroughs  Adding  Machine  Co., 
Detroit,  Mich. 


CHECKS  AND  THEIR  COLLECTION  387 

the  banks  in  forty-eight  other  cities  can  be  designated  by 
their  clearing-house  numbers.  For  instance,  in  New  York 
State  three  cities  have  been  given  numbers  of  their  own, 
namely,  New  York  No.  1,  Buffalo  No.  10  and  Albany  No. 
29.  The  next  city  in  the  State,  according  to  population,  is 
Rochester,  which  it  the  first  city  numbered  with  the  State 
prefix,  which  is  number  fifty.  The  Rochester  banks  are 
numbered  50-1,  50-2,  etc.  The  system,  therefore,  permits 
the  use  of  clearing-house  numbers  to  designate  banks  in 
ninety-seven  of  the  principal  cities  of  the  country.  The 
Treasurer  and  Assistant  Treasurers  of  the  United  States 
and  the  postoffices  in  the  reserve  cities  have  been  given  num- 
bers. Numbers  have  not  been  provided  for  express  compa- 
nies, railroads  or  mercantile  firms.  If  the  clearing-houses 
in  any  of  the  forty-nine  numbered  cities  wish  to  have  addi- 
tional numbers  supplied  for  express  companies,  railroads, 
etc.,  they  can  forward  a  list  to  the  American  Bankers  Asso- 
ciation and  the  numbers  can  be  provided. 

The  State  numbers  have  been  divided  into  five  sections 
as  follows: 


Eastern    . 50  to  58 

South  Eastern   60  to  69 

Central 70  to  79 

South   Western    80  to  88 

Western   .  .  .90  to  99 


The  States  containing  the  principal  collecting  centers, 
namely,  New  York,  Pennsylvania,  Illinois,  Missouri  and 
California,  have  been  given  the  first  numbers  in  their  re- 
spective sections:  50-60-70-80-90,  to  facilitate  the  listing  of 
items  on  the  adding  machine  as  only  one  key  is  used  to  print 
these  numbers  and  also  to  indicate  that  the  following  nine 
numbers  in  each  section  represent  the  States  in  the  same  ter- 
ritory. Numbers  59  and  89  are  left  blank  and  can  be  used 
in  the  future  should  it  become  necessary  to  number  the 
banks  in  our  island  possessions  and  Alaska.  The  system 
of  numbering  the  States  in  groups  according  to  territory 
should  also  prove  to  be  of  advantage  in  memorizing  the 
State  numbers.  With  the  exception  of  five  States  represent- 
ing each  section  the  States  are  numbered  in  alphabetical 
order  in  each  section. 


388 


THE   PRACTICAL  WORK  OF   A   BANK 


The  numbers  of  the  different  cities  and  States  are  as 
follows : 


CITIES. 

1.  New  York  City 

2.  Chicago,  111. 

3.  Philadelphia,  Pa. 

4.  St.  Louis,  Mo. 

5.  Boston,  Mass. 

6.  Cleveland,  O. 

7.  Baltimore,  Md. 

8.  Pittsburgh,  Pa. 

9.  Detroit,  Mich. 

10.  Buffalo,  N.  Y. 

11.  San  Francisco,  Cal. 

12.  Milwaukee,  Wis. 

13.  Cincinnati,  O. 

14.  New  Orleans,  La. 

15.  Washington,  D.  C. 
10.  Los  Angeles,  Cal. 

17.  Minneapolis,  Minn. 

18.  Kansas  City,  Mo. 

19.  Seattle,  Wash. 

20.  Indianapolis,  Ind. 

21.  Louisville,  Ky. 

22.  St.  Paul,  Minn. 

23.  Denver,  Colo. 

24.  Portland,  Ore. 

25.  Columbus,  O. 

26.  Memphis,  Tenn. 

27.  Omaha,   Neb. 

28.  Spokane,   Wash. 

29.  Albany,  N.  Y. 

30.  San  Antonio,  Tex. 

31.  Salt  Lake  City,  Utah. 

32.  Dallas,  Tex. 

33.  Des  Moines,  la. 

34.  Tacoma,   Wash. 

35.  Houston,  Tex. 

36.  St.  Joseph,  Mo. 

37.  Ft.  Worth,  Tex. 

38.  Savannah,  Ga. 

39.  Oklahoma  City,  Okla. 

40.  Wichita,  Kans. 

41.  Sioux  City,  la. 

42.  Pueblo,  Colo. 

43.  Lincoln,  Neb. 

44.  Topeka,  Kans. 

45.  Dubuque,  la. 

46.  Galveston,  Tex. 

47.  Cedar  ttapids,  la. 

48.  Waco,  Tex. 

49.  Muskogee,  Okla. 


STATES. 


50.  New  York 

51.  Connecticut 

52.  Maine 

53.  Massachusetts 

54.  New  Hampshire 

55.  New  Jersey 

56.  Ohio 

57.  'Rhode  Island 

58.  Vermont 
59. 

60.  Pennsylvania 

61.  Alabama 

62.  Delaware 

63.  Florida 

64.  Georgia 

65.  Maryland 

66.  N.  Carolina 

67.  S.  Carolina 

68.  Virginia 

69.  W.  Virginia 

70.  Illinois 

71.  Indiana 

72.  Iowa 

73.  Kentucky 

74.  Michigan 

75.  Minnesota 

76.  Nebraska 

77.  N.  Dakota 

78.  S.  Dakota 

79.  Wisconsin 

80.  Missouri 

81.  Arkansas 

82.  Colorado 

83.  Kansas 

84.  Louisiana 

85.  Mississippi 

86.  Oklahoma 

87.  Tennessee 

88.  Texas 
89. 

90.  California 

91.  Arizona 

92.  Idaho 

93.  Montana 

94.  Nevada 

95.  New  Mexico 

96.  Oregon 

97.  Utah 

98.  Washington 

99.  Wyoming 


Numbers  have  been  provided  for  all  of  the  2,200  banks  in 
the  forty-nine  numbered  cities  and  also  in  the  forty-eight 
other  cities  showing  the  numbers  for  the  first  city  in  each 
State  numbered  with  the  State  prefix.  The  remaining  25,000 


CHECKS  AND  THEIR  COLLECTION  889 

banks  of  the  country  are  to  be  numbered  according  to  the 
following  plan :  The  first  numbers  to  be  given  to  the  banks 
in  the  largest  cities  and  to  be  continued  in  the  relative  order 
of  the  population  of  the  cities  in  each  State.  Each  bank  to 
be  numbered  in  consecutive  order  according  to  seniority  in 
each  city.  When  there  is  only  one  bank  in  a  town  the  banks 
are  to  be  numbered  in  alphabetical  order  according  to  towns, 
the  one  bank  towns  to  be  numbered  last.  Blank  numbers 
are  to  be  left  only  in  cities  of  5,000  population  and  over. 


Com  Ger  Tr  &  Sav  Bk  New  Orleans  1679.50  Mo  Pro  Nat  City  .  N.  Y. 


1,6  7  9. 50  NO-PRO 


THE    EVOLUTION    OF    THE    TRANSIT  LETTER FIRST    LINE    SHOWS  OLD    METHOD    OF   RECORD- 
ING   THE    DETAILS    ON    A    TRANSIT    LETTER    BY     HAND SECOND     LINE     SHOWS     THE 

SAME    WORK    BY    MACHINE — THIRD    LINE   SHOWS    THE    NUMERICAL   TRANSIT    SYSTEM 
AS    OPERATED   BY   A    TRANSIT    MACHINE 

The  blank  numbers  to  be  left  as  follows:  Population  of 
5,000  to  25,000,  two  blank  numbers;  25,000  to  50,000,  three 
blank  numbers;  50,000  to  100,000,  five  blank  numbers;  100,- 
000  and  over,  six  blank  numbers.4 

THE  TRANSIT  DEPARTMENT  IN  OPERATIONS 

The  transit  department  is  one  of  the  most  important 
departments  of  a  bank,  especially  in  the  banks  of  large  cities, 
and  therefore  it  is  absolutely  necessary  to  have  the  best  sys- 
tem possible  for  taking  care  of  the  many  transactions  that 
daily  pass  through  that  department. 

Assuming  that  most  banks  have  the  department  so  ar- 
ranged that  it  handles  both  incoming  mail  and  outgoing 
items,  that  is,  all  items  received  as  cash,  it  perhaps  is  well  to 
give  an  idea  as  nearly  as  possible  of  how  all  such  matters 
are  handled  and  perhaps  a  better  knowledge  may  be  ob- 
tained by  starting  with  the  morning's  mail  and  following 

4 As  described  in  pamphlet  on  "Clearing-Houses"  issued  by  the  American  In- 
stitute of  Banking. 

5 By  Edward  E.  Schoeneck,  of  the  Corn  Exchange  National  Bank  of  Chicago, 
before  Chicago  chapter.  3y  coyrtesy  of  the  author, 


340  THE    PRACTICAL   WORK   OF   A   BANK 

the  work  from  there  on.  Before  going  on  with  the  subject 
it  might  be  well  to  state  that  in  order  to  have  a  thorough 
knowledge  of  all  the  work  as  outlined  and  for  the  bank's 
best  interests  the  only  way  to  handle  the  incoming  mail  and 
the  collecting  of  transit  items  is  to  handle  these  in  one  de- 
partment. The  clerks  become  more  familiar  with  all  ar- 
rangements and  the  correspondent  banks  will  receive  better 
service. 

After  the  mail  arrives  from  the  postoffice,  where  it  usual- 


TRANSIT    TYPEWRITER     WITH     ADDING    ATTACHMENT 

Courtesy  Wahl  Adding  Machine  Co.,  Chicago,  111. 


ly  is  received  by  a  special  messenger  from  each  bank,  it 
should  be  so  arranged  that  it  should  then  come  under  the 
supervision  of  the  messenger  department  in  charge  of  a  head 
messenger,  who  should  see  to  it  that  it  is  properly  assorted 
by  keeping  out  all  personal  letters.  Then  separate  large  and 
small  letters,  which,  in  turn,  will  be  delivered  to  the  transit 
department.  All  large  letters  or  letters  with  many  items, 
should  be  taken  care  of  first,  then  follow  with  the  miscella- 
neous small  ones.  Clerks  should  be  especially  trained  to  sort 
this  mail  after  it  is  opened  by  the  messenger  department  and 
here  is  where  the  transit  department  steps  in  and  assumes 
its  part  of  the  work. 


CHECKS  AND  THEIR  COLLECTION  341 

It  requires  close  attention  to  these  letters,  and  where  the 
bank  has  a  large  amount  of  mail  daily,  the  same  must  be 
assorted  carefully  and  correctly  by  the  clerks  in  the  transit 
department,  so  that  it  will  be  received  in  a  prompt  manner 
by  the  collection  department,  discount  department,  transfer 
of  funds,  shipments  of  currency,  remittances  for  credit  of 
correspondent  banks  and  returns  for  items  sent  from  the 
transit  department,  etc. 

These  clerks  should  be  educated  to  know  the  country  ac- 
counts, so  that  when  sorting  the  mail,  they  are  able  to  pass 
upon  it  intelligently,  but  all  matters  of  doubt  should  be  re- 
ferred to  the  head  of  the  department  and  he  or  his  first  as- 
sistant, should  see  to  it,  that  all  letters  which  contain  items 
on  which  exchange  must  be  charged,  should  receive  the  prop- 
er attention  and  a  debit  ticket  should  be  made  for  all 
charges.  The  debit  tickets  should  be  handed  to  clerks  that 
advise  the  credits  and  they  should  advise  the  amount  so 
charged,  checking  each  debit  with  the  letter  on  which  the 
exchange  is  charged,  then  at  the  close  of  business  each  day, 
the  total  amount  of  debit  tickets  can  be  credited  to  the  ex- 
change account.  It  facilitates  bookkeeping  to  charge  the  ex- 
change by  ticket  instead  of  deducting  it  from  each  letter 
and  the  correspondent  banks  can  check  their  statements 
without  trouble.  Some  banks  prefer  to  have  a  monthly  state- 
ment of  their  charges  and  this  can  easily  be  taken  care  of 
by  having  a  certain  clerk  look  after  such  arrangements. 

As  soon  as  each  assorter  has  a  number  of  cash  remit- 
tances ready,  they  should  be  delivered  to  clerks  to  check,  and 
these  clerks  should  so  mark  their  letters  that  as  few  figures 
as  are  necessary  will  have  to  be  used  by  the  clerk  that 
has  charge  of  what  may  be  termed  the  in-mail  box.  For 
example,  one  letter  may  contain  a  mixed  lot  of  checks,  say 
five  or  ten  on  New  York  City,  ten  or  more  on  Chicago,  and 
perhaps  a  few  outside  checks,  some  currency  or  coupons,  and 
also  city  cash  collections.  To  illustrate  this  further  a  chart 
is  given  which  gives  the  idea  more  clearly : 


N.  Y 

c.  H 

Tran 

Col 

Cy  or  Coupons. 
Total 


342 


THE   PRACTICAL  WORK  OF   A   BANK 


This  can  either  be  arranged  by  having  a  stamp  made  to 
put  on  each  cash  letter  as  it  is  handled  by  the  checker,  or  a 
small  slip  attached  to  each  letter,  will  answer  the  purpose. 
Each  checker  can  make  up  the  totals  by  first  running  the 
amounts  on  an  adding  machine,  then  transfer  them  to  this 
"make-up"  slip  for  the  convenience  of  the  clerk  that  has 
charge  of  the  "in-mail"  book.  It  is  well  to  have  your  cor- 
respondents so  instructed  wherever  possible  that  they  will 


THE  NATIONAL  BANK  OF  THE  REPUBLIC. 

CAPITAL  92.000.0OO.     SURPLUS  AND  UNDIVIDED  PROFITS  S1.OOO.OOO 

NATIONAL  CITY  BANK  CHICAGO  MAY   20  07 

NEW  YORK   N  Y 


nangt  AIA  rrmu  *u  AHT>  OVHI  v  HLKSS  OTHERWISE  DUTHOCTSD. 

WIKK  NON-PAYMENT  OF  ITKMk  JMO  OK  OVER. 
IDHRENDKR  DOCUMENTS  »TT»caKD  ON  PAYMENT  ONI.Y. 


We  enclose  the  following  items  for  collection  and  credit* 

iry  truly, 

ft.  M.  MoKnWEY,  Cashie 


IMP  t  TRADERS  (NAT  BK 
2ND  NAT  BK 
UNION  EXCH  BK 

2  000  00 

30  ooo  oo 

12  500  00 

ILL  SEWING  WACH  CO 
M  PHILIPSBORN 

NAT  BK  COM 
NAT  PARK  BK 
IMP  4  TRADERS  NAT  BK 
NAT  BK  COM 
UNION  BK  BROOKLYN 
NAT  3X  COM 
NAT  CITY  BK, 
IMP  &  TRADERS  NAT 

3  200  00 
1  078  90 
2  500  00 
2  119  45 
1  615  17 
10  000  00 
1  568  00 
2  020  41 

G  WACKENREUTER 
STEcRIN  MAYER  &  CO 
PACIFIC  COAST  BORAX  CO 
NAT  WASHBOARD  CO 
13  N  W  TR  &  SAFE  SEATTLE 
CHG  PNEU  TOOL  CO 
J  V  FARVVELL  CO 

68  601  93 

SPECIMEN 

TRANSIT    LETTER THE    NAMKS    OF    THE    BANKS    IN    THE    COLUMN    AT    THE    LEFT    WOULD, 

UNDER   THE    NUMERICAL   TRANSIT   SYSTEM,   BE    DESIGNATED    MERELY   BY    NUMBERS— 
THUg    "1-54"    WOULD    INDICATE    THE    NATIONAL    PARK    BANK    IN    THE    FIFTH    LINF 

separate  their  items,  i.  e.,  the  clearing-house  checks  and  the 
out-of-town  items,  so  that  when  the  remittances  are  received, 
all  that  is  necessary  is  to  put  the  total  on  each  package, 
charge  to  the  proper  department  and  they  are  obliged  to 
prove  all  such  packages.  After  the  packages  are  proven, 
then  take  a  recapitulation  of  the  package  totals  and  this  will 
tell  if  they  have  been  run  off  correctly.  A  machine  is  now 
on  the  market  which  assists  in  proving  the  packages  by  hav- 
ing the  grand  total  ready  when  the  last  package  has  been 
proven. 

As  the  "in-mail"  book  takes  all  the  cash  remittances  after 


CHECKS  AND  THEIR  COLLECTION 


813 


they  have  been  checked  by  the  checkers  this  work  is  best 
illustrated  by  the  f orm  as  follows : 


C.H. 

Singles 


Gen'l 
Bks. 


C.H. 

Packages 


New 
York 


Nat.  Bks. 
A.  to  K. 


Nat.  Bks. 
L.  to  Z. 


Debit 

Transit 
Singles 

Credit 

Bk.  &  Bkrs. 
A.  to  K. 


Bk.  &  Bkrs. 
L.  to  Z. 


Note 
Teller 


Dfts.  Exch. 


The  "in-mail"  work  should  be  balanced  according  to  lots 
or  batches,  say  any  number  one  to  five  or  more,  which  would 
enable  you  to  locate  a  difference  in  a  very  short  time.  After 
each  department  has  balanced  with  this  clerk,  he  then  takes 
a  trial  balance  and  if  the  figures  agree,  slips  can  be  filled  out 
and  the  figures  turned  over  to  the  note  teller  or  transfer 
teller,  as  follows: 

Mail  Debit. 
Date. 


Clearing  House : 

New   York    : 

Remittances  (transit)   : 

Remittances  (transit)   : 

Note  Teller  : 

Currency   : 

Coupons  : 

Total    .  : 


Mail  Credit. 
Date. 


General   Books    

Nat'l  Books  A  to  K 

Nat'l  Books  L  to  K 

B.  &  B.  Books  A  to  K 

B.  &  B.  Books  L  to  Z 

Country  Individual  Accts... 

Drafts    

Exchange    

Total    . 


In  transit  departments  where  both  incoming  and  out- 
going mail  is  handled,  there  should  be  clerks  to  handle  all 
cash  "charge-up"  items  returned  unpaid,  transfers  to  New 
York  and  other  cities,  advising  shipments  of  currency,  as 
well  as  remittances  to  banks  for  items  received  for  collection 
from  banks  that  have  no  regular  account  on  the  books. 


23 


THE    PRACTICAL   WORK   OF   A   BANK 


These  clerks  can  arrange  to  advise  all  credits  received  from 
correspondents,  after  they  have  been  entered  on  the  books 
by  each  bookkeeper  who  receives  the  credits  from  the  "in- 
mail"  book  previously  mentioned. 

It  is  necessary  to  have  some  kind  of  record  of  the  terms 
with  each  correspondent  bank,  and  a  card  with  this  informa- 
tion already  printed  on  gives  a  clerk  an  idea  of  what  to 
follow.  After  the  account  has  been  opened  the  information 
necessary  can  be  added  to  that  already  on  the  card  and  on 
the  reverse  side  a  memorandum  can  be  kept  of  special  agree- 


UNION  BANK  &  TRUST  CO. 

Jacfaoit,  Ham. , IS 

DmSin 


Endanipttatt  Ottd  tar  Collection  and 
items  enumerated  Mow. 

FROTEST  ALL  PATES  VNLESS  OTHERWISE  O/STKVCTED. 


TRANSIT    LETTER    FOB     CASH     ITEMS — CARBON    AND     PENCIL    PROCESS 

ments,  but  all  letters  pertaining  to  these  arrangements 
should  be  kept  in  a  special  file  for  that  purpose.  It  is  also 
well  to  know  what  your  correspondent  banks  are  charging 
and  a  card  with  the  itemized  rates  will  be  found  useful.  In 
fact,  the  card  system  has  been  found  a  most  important  part 
in  the  keeping  of  records  in  a  transit  department  and  is  re- 
ferred to  frequently.  This  does  away  with  trying  to  keep 
records  with  too  many  different  clerks  or  in  books  where 
the  information  is  not  always  readily  accessible. 

In  most  large  banks  it  is  so  arranged  that  a  certain  clerk 
is  given  charge  and  perhaps  is  called  the  manager.  He  must 
see  to  it  that  the  work  is  divided  among  his  many  assistants 
so  that  no  part  of  the  book  work  is  to  be  done  by  him;  he 
should  have  the  power  of  making  terms  for  handling  his 
items;  must  c< instantly  be  on  the  lookout  for  new  arrange- 


CHECKS  AND  THEIR  COLLECTION  345 

merits  that  would  benefit  the  bank;  must  arrange  for  the  par 
points  to  be  given  to  the  bank's  correspondents;  must  see 
that  all  large  items  are  given  special  attention  and  especially 
cost  items,  and  must  endeavor  to  obtain  special  rates  on  the 
same.  He  must  also  educate  his  assistants  to  handle  this 
part  of  his  work  and  must  have  at  least  one  clerk  who  may 
be  called  his  first  assistant,  trained  so  that  the  work  of  the 
bank  or  department  will  not  be  dependent  upon  one  person 
only.  This  rule  should  be  applied  to  each  and  every  mem- 
ber of  the  department  and  each  clerk  should  have  a  set  of 
rules  or  instructions  pertaining  to  his  work,  so  that  a  change 
can  be  made  at  any  time  without  inconvenience. 

The  foregoing  gives  an  idea  of  the  general  routine  of  the 
work  before  we  take  up  that  part  of  the  department  which 
will  now  be  outlined  after  the  "in-mail"  clerk  sorts  his  tran- 
sit items.  You  will  notice  on  a  previous  chart  that  they  are 
listed  so  that  the  packages  are  in  one  column,  singles  in 
another. 

In  the  department  there  should  be  a  clerk  called 
"scratcher"  man,  who  receives  these  items  from  the  mail 
book  and  after  listing  the  packages  they  are  proven  as  pre- 
viously stated  and  as  each  package  is  ready,  it  is  delivered  to 
the  "head  router"  and  it  is  here  where  a  most  important  part 
of  the  work  of  the  handling  of  the  outgoing  items  com- 
mences. The  manager  of  the  department  should  arrange  it 
for  this  clerk  so  that  he  can  assort  his  items  in  the  best 
manner  possible;  and  while  some  banks  arrange  the  sorting 
of  their  items  by  lists,  a  very  good  way  is  to  copy  the  lists 
of  your  correspondents  into  a  book,  using  a  bankers'  direc- 
tory specially  made  for  that  purpose  and  by  this  method  it 
does  away  with  having  to  look  after  too  many  records  per- 
haps kept  in  different  places.  When  obtaining  lists  from 
your  correspondent  banks,  you  should  ascertain  what  points 
are  handled  direct  by  them  and  what  indirectly  and  this  in- 
formation should  show  in  the  book  mentioned.  You  agree 
upon  certain  marks  for  a  "direct"  point  and  when  not 
marked  the  point  will  be  considered  "indirect."  When  re- 
ferring to  this  book  you  will  readily  find  whether  it  would 
be  to  the  bank's  interest  to  route  indirectly  a  very  large  item, 
and  it  perhaps  would  be  well  to  give  instructions  to  the  head 
router  not  to  send  items  in  that  manner  when  over  a  certain 
amount.  New  lists  should  be  received  from  your  corre- 


846  THE   PRACTICAL  WORK  OF   A   BANK 

spondents  at  certain  intervals,  so  that  the  records  would  be 
up  to  date. 

The  head  router  should  have  a  desk  or  table  so  arranged 
that  the  items  could  be  assorted  in  different  boxes  and  he 
should  .have  sufficient  time  to  enable  him  to  assort  his  items 
correctly. 

The  work  should  be  arranged  in  sets,  so  that,  for  exam- 
ple, all  items  that  go  to  correspondents  in  large  cities  where 
accounts  are  kept  are  in  charge  of  a  clerk  and  the  work, 
which  is  of  sufficient  quantity,  will  indicate  that  large  letters 
are  necessary.  This  work  can  be  done  on  machines  which 
are  specially  built  for  that  purpose,  such  as  a  Remington 
typewriter  machine  with  Wahl  adding  attachment,  Elliott- 
Fisher  machine  and  others.  The  Burroughs  Adding  Ma- 
chine Company  are  advocating  the  handling  of  transit  let- 
ters on  their  machine,  by  using  the  number  system  for  en- 
dorsements and  the  number  system  for  the  drawee,  for  items 
on  banks  in  large  cities,  i.  e.,  large  letters. 

It  is  well  to  have  the  work  so  arranged  that  each  clerk 
receiving  a  certain  amount  of  items  is  charged  with  that  to- 
tal, so  that  he  can  balance  his  work  independently  of  anoth- 
er. This  can  be  arranged  according  to  the  amount  of  work 
each  bank  handles  and  if  the  volume  of  business  is  large,  the 
work  can  be  so  fixed  that  one  or  more  States  can  be  divided 
according  to  the  amount  of  business  on  each  State,  and  this 
will  assist  the  head  router  in  knowing  just  where  to  sort  his 
items.  The  items  are  assorted  according  to  the  town  by  the 
alphabet  by  some  banks,  but  this  can  be  worked  out  very 
easily  according  to  the  way  each  bank  prefers.  This  ap- 
plies principally  to  that  part  of  the  items  for  which  the 
banks  remit  by  draft.  All  "charge  up"  items  can  be  assort- 
ed to  clerks  who  have  accounts  that  allow  banks  to  charge 
items  to  their  accounts,  and  this  can  be  divided  by  calling 
the  divisions,  say:  "National  charge  up  accounts,"  "Banks 
and  bankers  charge  up  accounts,"  and  would  be  arranged  in 
sets  according  to  the  number  of  bookkeepers  in  each  bank. 
These  can  be  run  on  books  of  small  letters  which  are  carbon 
copy,  say  twenty  letters  or  more  to  each  page,  using  a  num- 
ber for  banks  that  remit  for  items  and  for  all  small  "charge- 
up"  letters  of  same  size  it  is  not  absolutely  mecessary  to  have 
the  number  system,  the  date  being  sufficient  in  tracing  an 
acknowledgment. 


CHECKS  AND  THEIR  COLLECTION  847 

All  "large"  letters  that  banks  allow  to  be  charged  to 
their  account  can  be  handled  on  the  large  machine  sheets 
just  mentioned. 

After  receiving  his  checks  each  clerk  should  make  a  list 
of  them  on  the  adding  machine  before  sorting  them  to 
charge  to  his  correspondents  on  his  set  and  keep  adding  to 
his  list  after  he  has  assorted  the  first  lot.  The  sum  of  all 
these  lists  must  agree  with  the  totals  of  the  letters  and  he 
will  know  his  work  has  been  balanced  each  day.  Then  each 
clerk  should  give  the  totals  of  his  lists  to  a  clerk  in  the  de- 
partment who  should  have  charge  of  what  is  called  a  "proof 
scratcher"  and  the  sum  of  these  lists  on  his  scratcher  should 
agree  with  the  total  amount  charged  to  the  other  scratcher, 
which  is  a  proof  on  the  work  received  from  the  mail  book 
and  tellers.  The  "proof  scratcher"  should  see  to  it  that  fig- 
ures are  then  turned  over  to  the  general  bookkeeper  repre- 
senting the  total  of  the  work  handled  in  the  department  for 
the  day. 

Some  banks  handle  as  cash  a  large  amount  of  drafts  with 
bills  of  lading  attached.  These  are  handled  in  the  transit 
department  and  if  the  volume  of  business  is  sufficiently  large, 
a  special  book  can  be  used  to  record  each  draft,  so  that  full 
costs  can  be  recovered,  i.  e.,  exchange  and  interest  for  time 
drafts  were  outstanding  over  a  certain  number  of  days. 

All  work  in  the  department  should  be  carbon  copy. 
Many  banks  throughout  the  United  States  have  their  work 
so  arranged  that  practically  all  of  it  is  done  by  machines 
previously  mentioned. 

Banks  are  continually  on  the  watch  for  systems  that 
will  improve  the  work  in  this  department  and  it  is  safe  to 
say  that  there  is  no  department  in  a  bank  that  requires  as 
many  changes  as  the  transit  department,  and  usually  the 
new  innovations  are  an  improvement,  so  that  the  department 
is  bound  to  be  one  of  the  best  in  a  bank,  when  properly  man- 
aged. There  was  a  time  when  the  work  was  done  by  pen 
and  ink  and  copied  in  a  copy  book.  Registers  were  kept 
and  in  many  instances  banks  kept  a  complete  record  of  each 
check.  The  changes  that  have  been  made  certainly  are  won- 
derful. 

The  work  of  the  transit  clerk  is  best  illustrated  when  you 
consider  that  he  must  see  that  his  items  are  sent  to  the 
right  correspondent ;  he  must  see  that  the  proper  instructions 


848  THE    PRACTICAL   WORK  OF   A   BANK 

are  entered  on  his  letter;  he  must  watch  to  see  that  all  items 
are  endorsed  correctly.  Some  banks  have  clerks  whose  spe- 
cial duty  it  is  to  endorse  the  items.  Some  endorse  them 
"Pay  any  bank  or  banker,"  etc.,  and  many  prefer  to  endorse 
them  to  the  bank  to  which  they  are  sent.  The  latter  is  the 
proper  way  and  does  away  with  the  question  of  a  qualified 
or  restrictive  endorsement. 

The  transit  clerks  must  also  see  that  all  items  are  paid 
or  advised  promptly,  and  if  not,  notify  the  customer;  should 
balance  his  outstanding  or  unpaid  items  regularly  and  also 
trace  those  not  accounted  for,  collect  interest  on  overdue 
drafts  and  watch  for  other  similar  matters  which  may  oc- 
cur from  day  to  day. 

It  is  well  to  keep  a  record  of  the  number  of  checks  each 
transit  man  handles;  this  gives  you  a  good  idea  of  the 
amount  of  business  transacted  and  the  information  proves 
very  interesting  from  year  to  year. 

As  each  clerk  should  balance  his  work  separately  as  pre- 
viously stated,  a  special  book  should  be  kept  by  the  man- 
ager of  the  department  or  his  assistant,  of  the  amount  each 
clerk  has  outstanding  and  the  totals  in  such  book  should 
agree  with  the  amount  outstanding  according  to  the  total  or 
the  general  books. 

Some  banks  have  their  work  so  arranged  that  when  the 
letters  are  ready  to  be  sent  out,  they  are  delivered  to  the 
messenger  department  and  under  the  direction  of  the  head 
messenger  he  has  the  clerks  in  his  department  handle  the 
outgoing  mail  by  allotting  a  certain  number  of  letters  of  the 
alphabet  to  each  man  according  to  the  volume  of  business. 
By  this  arrangement,  they  are  able  to  enclose  items  from 
the  different  departments  all  in  same  envelope  when  in- 
tended for  a  certain  bank,  thereby  saving  quite  a  sum  to  the 
bank  in  postage,  and  at  the  same  time  have  the  mail  in  such 
shape  so  that  it  can  be  handled  by  the  correspondents  in  a 
more  satisfactory  manner  than  if  they  were  to  receive  prob- 
ably half  a  dozen  or  more  letters  from  a  bank  daily,  espe- 
cially where  banks  in  large  cities  deal  extensively  with  banks 
in  other  large  cities. 


2 

O 


t 

! 


I 


348  A 


z 

o 

z 

£ 

cc 

c 


848 


CHAPTER  XII. 

BANK  EXAMINATIONS  AND   AUDITS 

The  examination  of  a  bank  has  for  its  purpose  the  deter- 
mination: (a)  That  the  bank  is  solvent;  (b)  that  it  has,  as 
it  claims  to  have,  assets  of  certain  worth;  (c)  that  its 
methods  are  clean  and  its  management  conservative  and 
sound;  (d)  that  the  technique  of  its  operation  is  efficient 
and  modern,  and  to  suggest  changes  in  the  system  to  make 
it  a  smooth  running  accounting  machine. 

The  examiner  going  from  bank  to  bank  acquires  a  fund 
of  information  that  he  can  use  to  advantage,  if  the  bank  be 
in  a  receptive  mood  and  is  anxious  to  improve  its  service, 
and  can  advise  the  officers  in  many  things  to  their  profit. 

Frequently  we  see  men  overworked  for  no  useful  pur- 
pose; doing  things  in  the  hardest  way;  doing  the  same  work 
twice  when  once  should  suffice;  writing  where  a  rubber 
stamp  would  be  far  better,  and  failing  to  appreciate  the 
usefulness  of  the  carbon  sheet  and  other  labor-saving  de- 
vices that  make  for  efficiency  in  the  day's  work.  But  such 
are  the  conditions  in  large  and  presumably  well-managed 
banks  that  lay  claim  to  aggressiveness.  The  author  once 
had  the  pleasure  of  drawing  up  a  plan  to  reduce  the  opera- 
tions from  seven  to  four  in  handling  mail  items,  only  to 
find  the  Chinese  wall — "We  have  always  done  it  with  seven, 
why  four?" — in  his  way;  and  they  do  it  with  seven  yet.  In 
another  case  the  deposits  were  listed  on  sheets  each  day  and 
the  entries  on  each  sheet  counted  to  record  the  number  of 
items.  And  no  one  had  ever  thought  of  numbering  the 
lines ! 

RIGHT  TO  EXAMINE,  POLICE  POWER 

This  right  to  examine  is  recognized  as  part  of  the  police 
power  of  the  State,  for  the  good  of  all;  and  while  in  Eng- 
land there  is  no  such  thing  as  bank  examinations,  each  bank 
being  a  law  unto  itself,  such  a  condition  here  would  lead  to 
chaos  in  the  banking  world;  for  we  need  the  steadying  hand 
of  supervision  to  keep  the  ships  off  the  rocks,  even  the  little 
ones. 

349 


9SO  THE   PRACTICAL  WORK  OF   A  BANK 

The  ultimate  end  and  aim  of  the  examination  is  to  pro- 
tect the  stockholder  and  the  depositor  from  losses  due  to 
unsound  banking  operations.  The  large  stockholder  needs 
protection  from  the  directors  and  other  stockholders,  the 
little  stockholder  needs  protection  from  the  big  stockhold- 
ers, the  depositor  needs  protection  from  both,  and  the  di- 
rectors need  protection  from  themselves. 

While  the  law  imposes  a  liability  of  twice  the  capital 
holdings,  it  is  seldom  if  ever  collected  in  full,  and  the  pen- 
alty if  enforced  upon  the  little  fellow  would  be  difficult  to 
recover;  and  even  though  it  were  not  so,  to  protect  him  for 
his  own  sake  is  worth  while.  Many  a  stockholder  invests 
with  no  thought  of  his  risk,  looking  only  to  his  dividends; 
and  in  his  ignorance  he  should  be  assured  of  sound  policies 
and  solvent  condition.  It  goes  without  saying  that  the  de- 
positor needs,  and  is  entitled  to,  all  the  protection  that  prop- 
er examining  methods  can  give. 


BANK  EXAMINATIONS  or  Two  CLASSES 

Bank  examinations  may  be  divided  into  two  classes:  (1) 
External  examinations  performed  by  the  Comptroller  of 
the  Currency,  State  banking  departments,  clearing-houses 
and  periodical  audits  by  certified  public  accountants;  and 
(2)  internal  examinations  or  audits  made  by  the  bank's 
auditing  staff  or  public  accountants.  The  latter  is  in  the 
nature  of  an  internal  audit  by  an  outside  source,  but  the 
audit  is  by  order  of  the  bank  and  not  by  an  independent 
supervising  body.  The  most  common  form  of  internal  audit 
is  the  examination  by  the  directors — a  bank  examining 
itself. 

Checking  the  books  of  a  bank  does  not  warrant  the 
solvency  of  the  bank  any  more  than  checking  the  books  of  a 
mercantile  house  warrants  profits.  It  is  not  an  audit.  The 
examination  should  be  what  the  accountant  would  call  an 
investigation;  as  if  the  books  of  the  bank  were  destroyed, 
and  the  problem  was  to  ascertain  what  the  bank  owned  and 
what  it  owed  independent  of  its  records.  And  without  using 
the  books  of  record,  except  as  a  guide,  a  bank  may  be  fully 
examined. 


EXAMINATIONS  AND  AUDITS  851 

EXAMINATIONS  BY  DIRECTORS 

It  is  reasonable  to  conclude  and  easy  to  prove  that  an 
audit  of  a  bank  cannot  properly  be  made  by  a  committee 
of  directors.  In  the  first  place  they  do  not  know  how,  and 
are  often  coached  by  one  of  the  bank's  administrative  heads ; 
secondly,  they  have  not  the  time  to  do  it  properly,  and  as  a 
rule  verify  the  things  that  hardly  need  verifying,  and  over- 
look the  things  they  should  inquire  into. 

With  all  the  solemnity  of  a  judge  of  the  Supreme  Court, 
they  will  come  in,  without  warning,  count  the  cash,  call  for 
the  bonds,  and  perhaps  look  over  the  loans  and  discounts, 
and  it  may  be  verify  the  bank  balances;  but  overlook  the 
most  important  thing — the  accounts  with  depositors. 

Some  well-managed  banks  are  now  recognizing  the  fact 
that  the  board  of  directors  cannot  make  a  proper  audit  and 
so  employ  outside  accountants  for  this  purpose,  and  this  is 
as  it  should  be. 

An  accounting  firm  of  high  standing  submit  the  follow- 
ing as  their  conception  of  a  true  audit: 

First.    We  count  the  cash  in  detail  at  the  date  of  our  audit. 

Second.  We  submit  a  detailed  report  of  all  cash  items  which  are  being 
carried  by  the  bank. 

Third.  We  verify  the  balances  due,  to  and  from  other  banks,  by  corre- 
spondence. 

Fourth.  We  submit  a  detailed  list  of  all  overdrawn  accounts  showing  the 
date  the  overdraft  commenced. 

Fifth.  We  verify  all  loans  and  submit  a  detailed  statement  of  each  borrow- 
er's, director's,  officer's,  and  clerk's  liability  as  maker  and  endorser. 

Sixth.    We  submit  a  detailed  statement  of  all  suspended  or  past  due  paper. 

Seventh.    We  verify  all  securities  owned,  by  count  of  same. 

Eighth.  We  verify  all  deposits  by  trial  balance  of  the  ledgers,  and  we 
examine  all  pass-books  presented  during  our  stay  at  the  bank. 

Ninth.  We  verify  the  outstanding  capital  stock  by  examining  the  stock 
records. 

Tenth.  We  place  a  sufficient  force  of  accountants  on  the  work  so  that  our 
examination  will  be  completed  promptly. 

Eleventh.  We  submit  a  complete,  detailed,  typewritten  report,  covering  our 
audit,  and  we  include  therein  all  suggestions  for  improving  the  accounting 
system.  This  report  is  addressed  to  the  president,  or  to  some  one  authorized  by 
the  board  of  directors. 

Twelfth.  There  are  other  features  of  our  examination  which  we  would  not 
care  to  reveal,  as  they  are  safeguards  which  we  employ  to  detect  shortages  or 
manipulations. 

Mr.  E.  P.  Moxey  of  the  Comptroller's  office  in  Wash- 
ington tells  this  incident : 

"While  preparing  a  bank  case  for  trial  I  was  much 
amused  by  reading,  in  the  minutes  of  the  meetings  of  the 


852  THE    PRACTICAL  WORK  OF   A   BANK 

board  of  directors,  a  report  of  a  committee  of  the  board  on 
the  result  of  their  examination  of  the  bank.  As  far  as  1 
recall  the  wording  was  somewhat  to  this  effect:  'Your  ex- 
amining committee  begs  leave  to  report  as  follows:  We 
met  at  the  banking  house  on  Thursday  last,  after  the  close 
of  business,  and  counted  all  the  cash  in  the  possession  of  the 
several  tellers  and  that  in  the  vaults  of  the  bank,  and  found 
the  same  to  agree  with  the  amount  called  for  by  the  books 
We  examined  all  the  loans  and  discounts,  with  the  collateral 
securing  the  same,  also  the  stocks,  bonds  and  securities 
owned  by  the  bank  and  found  the  same  to  be  correct.  We 
also  examined  all  the  books  and  accounts  of  the  bank,  and 
found  the  same  correct  in  every  particular.  The  income  and 
expense  accounts  for  the  past  six  months  were  carefully 
audited  by  us,  and  are  correct.  We  completed  our  examina 
tion  and  adjourned  at  six-thirty  P.  M.' 

"And  the  report  might  have  added — 'in  time  for  supper 
in  the  board  room.' ' 

WHAT  THE  EXAMINER  SHOULD  KNOW 

The  qualifications  which  must  be  possessed  by  anyone 
who  wishes  to  be  considered  a  competent  bank  examiner  are : 

First — He  must  have  a  pleasing  personality,  tact  and 
character. 

Second — He  must  be  an  accountant  of  experience. 

Third — He  must  have  had  business  and  banking  train- 
ing. 

Fourth — He  must  be  thoroughly  versed  in  all  the  minute 
details  of  the  banking  business  and  know  some  of  the  ave 
nues  of  fraud. 

Fifth — He  must  be  well  posted  on  financial  subjects. 

Personality  plays  an  important  part  in  the  qualities  oi 
the  examiner.  A  certain  gentleman  creates  a  most  unfavor- 
able impression  while  examining  a  bank,  on  account  of  an 
unfortunate  trait  in  acting  as  though  he  considered  everj 
clerk  in  the  institution  a  thief.  As  a  consequence,  and  prop 
erly  so,  he  is  thoroughly  detested  by  them,  and  instead  of  re- 
ceiving their  hearty  cooperation  in  his  work,  every  obstacle 
is  thrown  in  his  way  to  impede  his  progress. 

A  thorough  knowledge  of  accounts,  not  only  those  of 
financial  institutions,  but  of  other  lines  as  well,  must  be  pos- 


EXAMINATIONS  AND  AUDITS  858 

sessed  by  the  competent  bank  examiner.  This  knowledge 
should  be  acquired  preferably  through  experience,  but  the 
general  principles  on  which  all  accounting  rests  may  be 
acquired  from  those  institutions  which  offer  courses  in  higher 
accounting.  The  more  experience  a  person  has  had  in  ac- 
counting work  the  better  bank  examiner  he  makes. 

Of  course  the  most  important  thing  that  makes  for  com- 
petency in  a  bank  examiner  is  a  thorough  familiarity  with 
every  detail  of  the  banking  business.  Unless  a  man  knows 
the  various  books  and  records  used  in  each  department  of  a 
bank  it  is  impossible  for  him  to  make  a  proper  examination. 

Not  many  years  ago  a  leading  member  of  Congress  pre- 
vailed upon  the  then  Comptroller  of  the  Currency  to  ap- 
point as  national  bank  examiner  for  his  district  a  gentle- 
man whom  he  praised  highly  as  being  thoroughly  qualified 
for  the  position.  As  a  matter  of  fact  that  gentleman  in 
question  had  never  been  inside  of  a  bank  in  his  life,  except 
to  make  a  deposit,  draw  a  check  or  have  a  note  discounted. 
It  is  needless  to  say  that  his  examinations  were  mere  farces, 
and  the  story  goes,  that  the  cashier  of  one  of  the  banks  he 
was  trying  to  examine,  out  of  the  goodness  of  his  heart, 
made  out  for  him  his  report  to  the  Comptroller.1 

The  examiner  should  not  approach  his  examination  as  a 
detective  looking  for  a  criminal,  but  as  a  big-hearted  indi- 
vidual looking  for  an  opportunity  to  help;  to  give  a  clean 
bill  of  health  if  possible,  but  to  discover  the  weaknesses  if 
any  exist;  to  build  up  by  testing  and  not  destroy  by  criti- 
cism. And  if  he  goes  at  it  aright,  makes  friends  with  the 
men.  is  dignified  but  agreeable,  he  can  get  much  help  from 
the  force. 

THE  PSYCHOLOGY  OF  ERRORS 

The  knowledge  that  one's  work  is  to  be  scrutinized  tends 
to  make  one  careful  in  that  work.  The  exercise  of  care  soon 
becomes  a  habit.  And  careful  habits  lead  to  efficiency.  And 
efficiency  leads  to  promotion  and  success.  Errors  are  usual- 
ly the  result  of  inefficiency. 

I  have  in  mind  a  case  of  a  large  bank  where  the  force  of 
an  entire  department  worked  until  late  at  night  in  the  en- 
deavor to  locate  an  error  of  $5,000  in  the  day's  work.  When 

iE.  P.  Moxey  before  New  York  Chapter. 


854  THE   PRACTICAL  WORK  OF   A   BANK 

this  was  finally  discovered  it  proved  to  be  an  item  for  $5,000 
added  to  a  remittance  letter  after  the  same  had  been  footed 
without  a  corresponding  change  being  made  in  the  total.  The 
person  directly  responsible  for  this  error  was  a  young  fellow 
whose  thoughts  were  not  centered  upon  his  work. 

Not  all  errors,  however,  are  made  unintentionally.  There 
may  be  those  who  have  been  unfaithful  to  the  trust  reposed 
in  them,  and  who  have  applied  the  funds  and  moneys  of  the 
bank  to  their  own  use.  This  stamp  of  man  lives  in  constant 
dread  of  detection,  for,  by  an  unexpected  examination  of  his 
books,  should  he  be  a  clerk  or  bookkeeper;  or  by  a  verifica- 
tion of  the  securities  owned  by  the  institution  or  held  by  it  as 
collateral  for  loans,  of  which  he  may  be  the  custodian;  or  by 
a  count  of  the  money  on  hand,  should  he  be  a  teller,  he  real- 
izes that  detection  is  inevitable.2 

An  error  known  to  exist  should  never  be  allowed  to  run 
long  without  locating  it,  unless  certain  that  it  is  not  the  be- 
ginning of  a  trail. 

It  is  the  examiner's  duty  to  trace  little  things  to  their 
end  and  find  out  what  they  mean,  for  they  may  lead  to 
serious  developments. 

On  a  certain  day  in  a  large  city  bank  the  incoming  mail 
department  found  at  the  close  of  the  day's  work  a  shortage 
of  a  few  hundred  dollars.  The  work  of  the  day  was  checked 
and  the  auditor  discovered  that  several  checks  of  even 
amounts,  as  shown  by  the  incoming  letters,  had  not  been  ac- 
counted for.  He  immediately  secured  complete  descriptions 
of  the  items,  and  learned  from  the  bank  where  they  were 
payable  that  they  had  been  paid  two  days  later  than  the 
date  of  receipt.  The  next  move  was  to  check  the  day's  work 
on  which  these  items  were  actually  paid,  and  the  examina- 
tion brought  out  the  fact  that  these  checks  had  been  inserted 
and  other  checks  of  the  same  amount  taken  out.  The  same 
process  was  then  used  in  locating  the  checks  of  the  second 
day,  and  the  examination  proved  that  this  substitution  was 
made  every  second  day.  This  process  was  continued  for  a 
period  of  about  two  weeks.  The  party,  then  thinking  he 
had  covered  his  tracks  so  that  tracing  of  the  items  was  al- 
most impossible,  drew  several  fictitious  checks  to  the  amount 
of  the  items  already  out,  and  drew  them  on  a  bank  that  it 

2E.  P.  Moxey. 


EXAMINATIONS  AND  AUDITS  855 

was  customary  for  him  to  list  in  preparing  the  clearing- 
house exchanges.  He  then  proceeded  to  open  an  account 
in  a  small  out-of-town  bank  (this  bank  being  a  correspond- 
ent of  the  employing  bank) ,  and  when  the  checks  were  for- 
warded to  their  correspondent  for  payment,  they  were  sub- 
stituted for  the  amount  taken  out  two  days  before,  and  of 
course  destroyed.8 

How  TO  MAKE  AN  EXAMINATION 

The  word  assets  comes  from  the  French  assez,  meaning 
"enough,"  and  the  question  to  determine  here  as  in  the 
granting  of  credit  is,  "Is  there  enough?"  The  examination 
of  the  resources  usually  takes  the  larger  part  of  the  exam- 
iner's tune,  while  little  attention  is  given  to  the  liabilities, 
which  is  no  doubt  due  to  the  limited  amount  of  time  at  his 
disposal.  While  proper  attention  should  be  given  to  the 
assets,  as  much,  if  not  more  thought  should  be  given  to 
the  liabilities,  for  the  individual  ledger  is  probably  one  of  the 
most  fertile  fields  in  which  to  detect  wilful  wrongdoing,  and 
this  usually  receives  the  least  attention  from  the  bank  exam- 
iner.4 

In  the  small  country  banks,  where  the  duplicate  system 
is  not  in  use,  there  is  very  little  check  on  this  portion  of  the 
work.  The  bookkeeper  in  charge  of  the  ledger  also  balances 
the  pass-books,  so  that  he  is  in  almost  complete  control  of 
this  particular  portion  of  the  work. 

The  following  directions  for  an  audit,  taken  from  a  work 
on  accounting  over  four  hundred  years  old,  are  interesting, 
both  for  the  language  and  the  exactness  of  the  procedure: 
"And  for  the  more  expedition  and  clearness,  ye  shall  keep 
this  order,  which  is  that  ye  take  and  assign  one  of  your  fel- 
lows to  help  you ;  for  it  were  much  labor  and  overtedious  for 
one  alone  to  examine  all  that  belongeth  to  this  act.  Where- 
fore for  the  more  speed,  first  deliver  to  your  fellow  the  Jour- 
nall  and  hold  yourself  the  ledger.  Then  request  your  fellow 
that  hath  the  Journall  to  begin  with  the  first  parcel  of  said 

a  Address  before  New  York  chapter.    Author  prefers  not  to  be  quoted. 

*An  examiner  of  country-wide  reputation  stated  to  the  author  recently  that 
he  always  examines  the  individual  ledgers  personally,  for  some  of  his  greatest 
achievements  as  an  examiner  have  resulted  from  clues  which  began  with  suspi- 
cious entries  on  the  individual  ledgers — particularly  "kiting"  operations. 


856  THE    PRACTICAL  WORK   OF   A   BANK 

Journall,  and  that  he  tell  you  the  name  and  the  thing  and  in 
what  leaf  of  the  ledger  it  standeth,  in  debtor  or  creditor,  so 
that  you  may  perceive  to  what  leaf  he  sendeth  you. 

"And  when  you  have  found  the  parcel  by  the  showing  of 
him  that  hath  the  Journall,  then  mark  and  make  a  token  in 
said  ledger  in  the  same  parcel  with  a  tick  upon  the  amount, 
or  some  other  sign  so  that  it  be  no  blemish  in  the  book.  That 
done,  say  to  him  that  hath  the  Journall,  that  he  also  make  a 
tick  or  sign  of  your  concordance.  And  beware  that  none  of 
you,  without  consent  of  the  other,  mark  any  parcel,  by  rea- 
son whereof  might  grow  grievous  labors  to  reform  the  cor- 
rection again  of  the  same.  For  the  parcels  discreetly  pe- 
rused and  so  marked,  testifyeth  a  due  examination. 

"Then  proceed  ye  forth  to  your  work  and  by  examining 
your  Journal  and  Ledger  together  of  all  the  parcels  both 
Debtors  and  Creditors  by  the  which  doing,  thoroughly  ex- 
amined ye  shall  perceive  and  find  if  your  said  ledger  be  per- 
fectly governed  and  compiled  or  not.  And  note  you  also 
that  every  one  parcel  in  your  Journall  must  for  the  concord- 
ance have  two  ticks,  because  it  ought  to  accord  with  two 
parcels  in  your  ledger,  one  in  debit  and  the  other  in  credit." 

As  to  the  bookkeeping  end,  the  first  thing  to  do  is  to 
close  the  books  and  take  a  statement,  so  that  a  basis  of 
reckoning  may  exist.  Some  banks,  particularly  savings 
banks,  do  not  take  a  daily  statement  of  the  general  ledger 
and  the  books  would  have  to  be  closed  to  get  this  informa- 
tion. The  examiner  might  use  the  ledger  for  this,  but  a 
statement  from  the  ledger  should  be  taken  as  a  guide  and 
also  as  a  record  of  how  the  bank  stood  when  the  examination 
was  made. 

Upon  beginning  the  examination,  the  examiner  places 
his  seal  on  all  vault  compartments,  so  that  substitutions  and 
manipulations  are  impossible.  If  the  securities  are  kept  in 
another  safe-deposit  box  or  in  another  city,  as  frequently 
happens  in  the  case  of  country  banks  which  keep  their  bonds 
in  New  York  or  other  large  city,  the  sealing  should  be  done 
by  a  representative.  In  New  York,  the  Banking  Depart- 
ment is  communicated  with  and  a  representative  of  the  de- 
partment seals  the  box  wherever  it  may  be.  This  of  course 
requires  credentials  and  such  are  furnished  the  one  sealing. 
If  securities  are  held  in  other  banks  on  loan,  for  special  de- 
posit, or  other  purpose,  the  holding  bank  is  notified  of  the 


EXAMINATIONS  AND  AUDITS  857 

fact  that  the  bank  is  under  test  and  to  hold  the  securities 
accordingly. 

CASH  AND  EXCHANGES 

Cash  is,  of  course,  counted  first,  and  it  should  all  be 
brought  to  the  examiner  at  one  time  and  kept  by  him  until 
verified.  Packages  may  be  verified  first  in  bulk  and  then 
in  detail,  or  vice  versa.  Ones  and  twos  if  in  large  volume 
are  not  counted  except  in  bulk,  or  tests  made  to  verify  a 
package  occasionally.  No  serious  loss  could  come  through 
such  a  medium  and  it  is  essential  not  to  block  the  wheels  by 
too  many  small  details  that  lead  nowhere.  Gold  and  silver 
are  sometimes  verified  by  weight  if  the  quantity  is  large. 

There  is  what  is  called  in  accounting  "lapping,"  which 
consists  in  holding  out  from  the  cash  items  sufficient  to 
cover  a  shortage  so  that  the  cash  will  show  the  balance  called 
for.  Thus,  a  teller  might  hold  out  enough  deposit  tickets  at 
the  end  of  the  day  to  make  good  a  shortage,  since  he  would 
not  have  to  account  to  the  bank  for  the  deposits  until  the 
next  day,  when  he  would  hold  out  some  more  and  so  on. 
Such  a  process  is,  of  course,  difficult  to  check  except  by  pass- 
ing the  deposit  through  two  hands,  or  substituting  tellers  so 
that  such  manipulations  are  difficult. 

After  the  cash  has  been  carefully  counted  the  matter  of 
arranging  for  the  verification  of  the  exchanges  should  be 
taken  up,  in  fact,  these  two  items — cash  and  exchanges — 
should  be  taken  up  together  if  the  force  of  examiners  war- 
rants. In  the  clearing-house  banks  of  New  York  City  the 
following  plan  for  the  verification  of  exchanges  has  been 
worked  out  with  splendid  results.  The  examiner  in  charge 
of  verifying  exchanges  takes  off  a  list  of  the  amounts  due 
from  each  bank  as  they  appear  on  the  envelope  about  to  be 
sent  through  the  exchanges,  placing  in  the  envelope  a  request 
for  verification  of  the  amount,  and  seals  the  envelope  with 
the  seal  of  the  banking  department.  Later  the  verification 
is  sent  to  the  examiner  in  charge  of  the  metropolitan  dis- 
trict by  the  receiving  banks. 

COLLATERAL  LOANS 

A  list  of  the  demand  loans  should  then  be  made  and  the 
amount  proved  with  the  general  ledger.  This  may  be  ac- 

24 


858  THE    PRACTICAL  WORK  OF   A  BANK 

complished  by  listing  the  amount  shown  on  the  several  loan 
cards,  and  the  total  of  such  cards  should  prove  with  the 
amount  shown  on  the  daily  proof.  The  cards  should  then 
be  retained  in  the  examiner's  possession  until  tne  securities 
have  all  been  verified.  The  collateral  to  these  loans  should 
then  be  examined  and  the  securities  checked  with  the  record 
as  shown  on  the  loan  cards.  The  market  value  of  the  col- 
lateral should  also  be  checked  to  ascertain  if  the  necessary 
twenty  per  cent,  margin  is  in  hand. 

If  the  examination  is  a  thorough  one,  the  amount  of  the 
loans  and  collateral  pledged  should  be  confirmed  by  the 
parties  to  whom  the  loans  have  been  made.  Defalcations 
have  frequently  occurred  by  the  failure  of  the  loan  clerk  to 
endorse  partial  payments,  or  amounts  paid  on  loans,  before 
they  become  due.  The  usual  custom  in  such  matters  is  to 
endorse  the  amount  paid  on  the  back  of  the  note  and  credit 
the  amount  to  the  proper  account  through  the  note 
teller's  department.  If  the  loan  clerk  is  so  disposed,  these 
payments  may  be  easily  kept  from  the  records  until  the 
notes  mature. 

One  means  of  defalcation  is  for  a  loan  clerk  to  withhold 
a  portion  of  the  securities  pledged  for  a  certain  loan.  For 
example,  here  is  a  loan  to  a  customer  for,  say,  $100,000,  and 
the  collateral  deposited  to  secure  such  loan  has  a  market 
value  of  $135,000,  or  a  margin  of  thirty-five  per  cent.  The 
loan  clerk  may  account  for  $125,000  worth  of  these  securi- 
ties and  appropriate  the  balance  of  $10,000  to  his  own  use. 
He  has  made  a  record  of  but  $125,000,  so  that  in  the  audi- 
tor's examination  the  securities  in  hand  check  with  the  cards. 
To  guard  against  this,  a  blank  should  be  sent  to  each  bor- 
rower requesting  him  to  give  the  amount  of  his  loan  and  list 
of  securities. 

The  examiner  does  not  display  his  hand,  and  so  sends  to 
borrowers  a  letter,  enclosing  statement  of  the  loan  and  col- 
lateral, with  instructions  to  verify  and  return,  "to  facilitate 
the  audit  of  the  bank."  The  letter  might  be  addressed  to 
the  sending  bank  with  the  initials  of  the  examiner  in  the 
corner,  but  the  intent  is  to  prevent  it  coming  into  the  hands 
of  any  bank  employee. 

The  loans  may  be  classified  according  to  the  books,  or  ac- 
cording to  the  examiner's  notions  into:  (a)  Collateral  loans 
secured  by  stock  exchange  collateral,  and  those  secured  by 


EXAMINATIONS  AND  AUDITS  859 

other  collateral ;  (b)  loans  secured  by  real  estate ;  (c)  single- 
name  paper;  (d)  two-name  paper.  Further,  if  desired,  into 
"own  paper"  (customers),  and  paper  bought  through 
brokers.  The  stock  exchange  loans  will,  therefore,  be  by 
themselves  and  can  be  quickly  tested;  while  the  other  loans 
might  need  more  attention. 

Loans  secured  by  real  estate  should  have  the  bond  and 
mortgage  properly  recorded  or  assigned,  insurance,  title 
search  or  abstract,  and  appraisal  by  a  committee  or  by  an 
independent  party.  The  value  of  the  property  is  the  essen- 
tial element  here,  real  estate  loans  scarcely  ever  being  made 
on  the  basis  of  moral  or  financial  worth,  the  loan  being  based 
solely  upon  the  property  pledged,  and  a  list  once  made  in  a 
bank  carrying  any  such  as  a  steady  policy  should  be  kept 
for  future  reference. 

UNSECURED  LOANS 

Promissory  notes,  whether  paper  bought  in  the  market, 
or  home  paper,  must,  of  course,  be  dated,  unmatured, 
properly  executed,  without  alteration,  and  regular  in  every 
form.  In  the  analysis  of  the  loans  the  item  of  "Past  Due*' 
should  be  first  taken  up. 

A  careful  list  should  be  made  of  the  various  items,  giving 
in  detail  the  date  of  the  instrument,  maker,  all  indorsements, 
due  date,  whether  or  not  the  note  has  been  protested  and 
the  present  status:  that  is,  what  the  possibilities  of  the  col- 
lection are,  making  a  note  at  the  same  time  of  the  name  of 
the  attorney  if  the  item  is  in  suit. 

The  amount  due  from  various  parties,  especially  di- 
rectors, should  be  inquired  into,  and  if  the  bank  does  not 
keep  a  liability  book  it  should  do  so.  The  paper  must  be 
what  it  purports  to  be,  and  the  parties  good.  Often  the 
examiner  will  have  a  wide  credit  acquaintance,  and  know 
many  of  the  makers  of  commercial  paper.  For  instance,  the 
name  of  a  Chicago  packing  house  would  be  known  to  every 
bank  examiner  and  finding  such  paper  he  knows  just  how 
good  it  is.  Local  paper  is  best  known  to  the  directors  and 
they  should  be  called  in  and  asked  to  pass  upon  paper  of 
that  sort.  As  a  rule  the  directors  know  nothing  of  outside 
firms  selling  paper  through  brokers  and  this  appraisement 
can  best  be  done  by  the  examiner.  Of  course,  if  time  peri 


860  THE    PRACTICAL  WORK  OF   A   BANK 

mitted  the  statement  of  each  borrower  could  be  checked,  but 
this  would  be  a  lengthy  task. 

In  order  to  keep  tabs  on  borrowers  in  New  York  State, 
and  to  ascertain  the  line  they  are  carrying,  the  New  York 
State  Banking  Department  is  now  operating  a  credit  bureau 
which  lists  every  loan  of  $5,000,  with  full  details  of  the  trans- 
action. This  gives  the  department  a  check  on  large  borrow- 
ers in  every  bank  in  the  State.  Borrowers  have  been  found 
having  lines  of  credit  in  thirty  different  banks. 

The  bills  discounted  or  bills  purchased  should  be  checked 
with  the  discount  ticklers.  The  discount  tickler  is  a  record 
of  the  bills  discounted  assembled  under  the  different  dates  in 
which  they  become  due.  As  the  notes  themselves  are  filed  in 
a  cabinet  in  the  same  manner,  the  checking  of  the  items  to 
the  tickler  becomes  a  very  simple  matter.  The  total  of  these 
books,  together  with  the  past  due  notes,  should  correspond 
with  the  amount  of  bills  discounted  on  the  general  ledger. 
All  notes  which  have  been  forwarded  for  collection  must  be 
verified  by  correspondence,  as  well  as  all  collateral  held  by 
other  institutions.  Totals  made  by  adding  machine  should 
be  proven,  and  no  clerk  allowed  to  make  these  lists.  Noth- 
ing should  be  taken  for  granted. 

GOVERNMENT  MONEYS  AND  SECURITIES 

The  receipts  from  the  United  States  Government  for 
bonds  deposited  to  secure  circulation  and  United  States  de- 
posits should  be  carefully  checked.  All  United  States  bonds 
to  secure  circulation,  United  States  and  other  bonds  to  se- 
cure United  States  deposits,  must  be  deposited  with  the 
Treasurer  at  Washington,  for  which  he  issues  a  receipt. 
These  securities  must  be  verified  by  the  receipt  in  possession 
of  the  bank.  Receipts  are  also  given  for  bonds  held  by 
other  public  officials.  Federal  Reserve  and  other  banks  as 
security  for  loans  or  deposits. 

DUE  FROM  BANKS 

A  list  of  the  items  composing  the  balance  due  from  banks 
should  be  made  and  the  amounts  forwarded  to  the  resnective 
hanks  for  verification.  The  account  of  "Due  from  United 
States  Treasurer"  is  also  verified  and  the  amounts  checked 
from  the  advices  received  from  the  Treasury  at  Washington. 


361 

VERIFYING  THE  LIABILITIES 

The  liabilities  of  the  bank  should  be  verified  with  even 
more  care  than  the  assets,  for  these  are  easily  under- 
stated. The  capital  stock  of  the  bank  may  be  verified  by 
listing  the  outstanding  stock  certificates,  and  this  may  be 
readily  accomplished  if  the  cancelled  certificates  are  fastened 
to  the  stub  from  which  they  were  originally  taken. 

The  liabilities  are  best  verified  by  correspondence  or  by 
cooperation  with  the  creditors.  But  the  main  liability  being 
on  the  deposit  accounts  it  becomes  very  important  that  this 
liability  be  not  understated.  There  is  no  way  by  which  this 
can  be  done  except  by  communication  with  the  depositors  in 
some  way.  In  a  savings  bank  this  is  done  by  examining 
the  pass-books  as  they  come  in  and  calling  them  in.  In 
Massachusetts  all  books  are  required  to  be  presented  once  in 
three  years  for  verification  purposes  and  all  banks  advertise 
for  books  and  in  some  cases  verify  as  high  as  ninety-five  per 
cent.  But  in  a  bank  of  discount  the  verification  is  not  so 
easy  a  matter. 

In  a  majority  of  the  larger  banks  the  use  of  pass-books 
has  been  discarded,  except  as  a  receipt  book  for  deposits,  and 
statements  similar  to  those  used  for  correspondent  banks 
have  been  substituted.  This  method  is  an  improvement  over 
the  old  one,  as  it  enables  a  bank  to  have  its  accounts  balanced 
each  month  and  mailed  to  the  respective  customers  from 
whom  a  report  is  usually  received  in  a  few  days.  These 
statements  should  be  sent  out  and  checked  as  to  reconcilia- 
tion by  the  examiner. 

If  the  old  pass-book  method  obtains,  the  books  may  be 
sent  for  and  written  up.  Depositors  cannot  verify  their  bal- 
ances without  knowing  what  checks  are  unpaid,  and,  of 
course,  vouchers  must  be  returned  with  any  statement  of 
reconciliation. 

The  correctness  of  balances  due  other  banks  may  be  veri- 
fied by  statements  rendered  or  received,  which  serve  as  the 
basis  for  reconcilement  reports,  disclosing  the  outstanding 
items  of  difference,  which  must  be  satisfactorily  adjusted. 

The  New  York  State  Banking  Department  has  desig- 
nated a  man  to  handle  the  verification  of  these  accounts  and 
all  data  received  by  him  from  the  examiners  is  used  for  this 


862  THE   PRACTICAL  WORK   OF   A   BANK 

purpose.  The  result  is  a  very  thorough  verification  of  this 
item. 

Items  in  the  assets  requiring  careful  analysis  and  verifica- 
tion are  furniture  and  fixtures,  accrued  interest  and  suspense 
account.  Very  often  there  will  he  found  charges  to  furni- 
ture and  fixture  account  which  are  not  proper  items  to  be 
carried  in  the  assets.  Accrued  interest  will  often  be  found  to 
be  a  harbor  for  items  which  cannot  be  regarded  as  assets  and 
the  same  may  be  said  of  suspense  accounts.  Loans  have  been 
charged  off  as  uncollectible  and  the  accrued  interest  on  same 
still  carried  as  an  asset.  It  has  also  been  found  that  the  fur- 
niture and  fixture  account  has  been  padded  by  charges  for 
repairs  and  alterations  to  building.  Accrued  interest,  furni- 
ture and  fixtures  and  suspense  account  are  too  often  accept- 
ed by  an  examiner  at  the  book  value. 

It  is  also  important  that  a  careful  analysis  of  the  assets 
should  be  made  for  the  purpose  of  ascertaining  the  percen- 
tage of  quick  assets  to  deposits,  or,  in  other  words,  what 
portion  of  the  assets  is  readily  available  for  liquidation  of 
the  deposits. 

The  paid  cashier's  checks  and  certificates  of  deposit  must 
be  carefully  checked  and  a  proof  made  of  the  outstanding 
items.  The  usual  custom  of  keeping  the  record  of  cashier's 
checks  is  to  list  all  such  items  in  a  register  provided  for  that 
purpose,  giving  the  number  of  the  check  and  the  amount. 
The  total  of  all  cashier's  checks  issued  is  credited  to  such  an 
account  on  the  individual  ledger,  and  when  such  items  are 
paid,  they  are,  of  course,  charged  against  this  same  account. 
The  paid  items  are  then  checked  off  the  register  and  the 
total  of  all  open  or  unchecked  amounts  must  correspond 
with  the  balance  in  the  ledger.  In  some  institutions  each 
cashier's  check  has  a  stub  attached  which  is  removed  by  the 
officer  who  signs  the  voucher.  All  such  stubs  are  forwarded 
to  the  auditor  and  the  amount  of  checks  issued  is  verified  by 
means  of  such  tickets. 

In  a  detailed  audit  care  should  be  given  the  expense  ac- 
count, and  in  auditing  this  account  great  care  should  be  ob- 
served to  see  that  every  bill  presented  has  been  checked  and 
initialed  by  the  proper  officer.  A  voucher  must  be  kept  for 
every  item  charged  to  this  account  to  enable  the  examiner  to 
readily  check  the  amounts  debited.  All  "overs"  or  "shorts" 
in  the  different  departments  must  be  promptly  located  by 


EXAMINATIONS  AND  AUDITS  368 

the  auditor  and  the  amount  adjusted  to  guard  against  the 
possibility  of  a  defalcation.  The  location  of  differences  in 
the  departments  has  been  simplified  by  the  installation  of  the 
sectional  proof.  The  proofs  enable  the  heads  of  departments 
to  so  divide  their  work  that  an  error  may  be  easily  located. 

CLEARING-HOUSE  EXAMINATIONS 

The  clearing-house  has  come  to  be  recognized  more  and 
more  as  a  regulating  force  to  make  for  good  banking,  as 
well  as  quick  and  expeditious  banking;  and  clearing-house 
examination  is  a  large  step  forward. 

The  people  have  come  to  look  to  the  clearing-house  to 
keep  banking  sound;  to  eliminate  the  bad;  sustain  the  good 
and  protect  all.  For  the  good  of  all  concerned  there  will 
come  a  time  when  all  loans  in  the  banks  of  a  clearing-house 
district  will  be  listed  with  the  clearing-house,  for  the  infor- 
mation of  all  members.  Such  a  bureau  is  promised  for  the 
Federal  Reserve  Banks. 

It  must  be  very  embarrassing  for  a  bank  to  find  that  it 
has  loaned  a  firm  up  to  the  limit  and  another  bank  has  done 
the  same;  when  by  an  exchange  of  information  both  could 
have  been  warned.  The  banker  who  knows  how  much  his 
borrower  owes  can  make  safe  loans;  the  banker  who  does 
not,  cannot.  And  the  borrower  who  will  not  let  his  bank  into 
these  secrets  had  better  be  left  alone. 

It  was  the  Walsh  bank  failures  in  Chicago  that  resulted 
in  the  carrying  out  of  the  idea  to  have  the  banks  that  are 
members  of  the  clearing-house  association,  and  banking  in- 
stitutions that  enjoy  clearing-house  privileges,  examined  by 
examiners  who  were  appointed  by  the  association.  The  mat- 
ter had  been  talked  of  before  the  Walsh  failures,  but  no 
definite  action  had  been  taken  to  inaugurate  the  work.  The 
Chicago  Clearing-House  Association  formulated  the  plan, 
created  the  department  and  the  office  in  1906,  and  in  June 
of  that  year  the  plan  became  operative. 

Speaking  of  the  plan  and  its  operation,  Mr.  McDougal, 
the  clearing-house  bank  examiner  for  Chicago,  said: 

"Having  from  the  clearing-house  committee  assurances 
that  every  facility  would  be  furnished  to  make  the  operations 
of  the  department  successful,  I  was  instructed  to  engage  the 
necessary  help,  and  to  proceed  upon  my  o^n  judgment  as  to 


364  THE   PRACTICAL  WORK  OF   A  BANK 

the  details  and  manner  of  examination.  General  directions 
were  given  me  by  the  committee  to  make  such  examinations 
as  would  enable  me  to  give  them  a  correct  impression  of  the 
general  condition  of  each  bank  as  examined.  As  a  matter  of 
course,  what  the  committee  particularly  wished  to  know  was 
the  general  condition  of  each  bank,  the  character  of  its  assets, 
and  the  manner  of  conducting  its  current  business. 

"After  each  examination  a  detailed  report  is  prepared  in 
duplicate,  setting  forth  a  description  of  the  bank's  assets, 
including  all  loans,  either  direct  or  indirect,  to  officers,  di- 
rectors or  employees  of  the  bank,  or  to  corporations  in  which 
they  are  interested,  also  describing  the  condition  as  found 
and  the  work  done  in  every  department.  One  of  these  re- 
ports is  filed  in  the  vaults  of  the  clearing-house  in  custody 
of  the  examiner.  The  other  is  handed  to  the  bank's  presi- 
dent for  the  use  of  its  directors.  The  individual  directors 
are  then  notified  that  the  examination  has  been  made,  and 
that  a  copy  of  the  examiner's  report  has  been  handed  to  the 
president.  By  so  doing  every  director  is  given  opportunity 
to  see  the  report  and  to  cooperate  in  maintaining  a  high 
standard  in  his  bank.  The  examiner  has  in  every  case  insist- 
ed upon  receiving  acknowledgments  of  these  notices  to 
directors. 

"The  detailed  report  referred  to  is  not  examined  by  the 
clearing-house  committee,  unless  unusual  conditions  make  it 
necessary.  A  special  report  is  prepared  and  read  before  the 
clearing-house  committee  at  meetings  called  for  that  pur- 
pose, expressing  in  general  terms  the  examiner's  opinion  of 
the  condition  of  each  bank  as  he  finds  it,  describing  the  gen- 
eral character  of  its  assets  and  calling  attention  to  any  un- 
warranted conditions  or  gross  irregularities,  should  they 
exist." 

BENEFITS  DERIVED 

Among  the  benefits  derived  from  these  examinations  the 
following  have  been  named :  "Mistakes  of  policy,  as  well  as 
of  judgment,  have  received  timely  correction;  jealousies  have 
been  overcome;  and  suspicion  and  distrust,  which  not  infre- 
quently exist  among  banks  having  no  real  knowledge  of  the 
condition  of  each  other's  affairs,  have  been  supplanted  by  re- 
spect and  confidence.  Closer,  more  satisfactory,  and  perfect- 


EXAMINATIONS  AND  AUDITS  865 

ly  harmonious  relations  have  been  established  and  are  main- 
tained." 

In  the  extension  of  the  idea  of  clearing-house  examina- 
tions of  the  banks,  the  California  Bankers  Association  has 
set  an  example  for  other  State  associations.  It  has  divided 
the  State  into  eleven  sections,  each  of  which  is  to  have  an  ex- 
aminer. The  Minnesota  Association,  or  the  individual 
groups,  have  done  practically  the  same  thing.  In  California 
one  of  the  sections  is  San  Francisco,  and  Los  Angeles  is 
another  section.  The  remaining  sections  take  in  counties  or 
portions  of  counties.  At  present  clearing-house  examina- 
tions are  being  conducted 'in  St.  Louis,  Kansas  City,  Minne- 
apolis and  St.  Paul,  etc.,  while  in  many  other  cities  the  sub- 
ject is  being  considered  and  many  bank  officials  are  very 
anxious  to  have  the  plan  put  into  operation.5 

LITTLE  POINTS  FOR  THE  EXAMINER 

The  examiner  should  look  particularly  to  little  things. 
He  should  investigate  any  cash  items  that  may  be  in  the 
cash;  check  the  petty  cash  fund;  verify  the  day's  exchanges 
and  drafts  sent  out  for  collection ;  see  that  the  last  coupon  is 
on  all  bonds.  Mortgages  should  be  properly  recorded  and 
taxes  paid.  Mortgage  must  not  exceed  the  legal  limits, 
usually  sixty  per  cent,  of  the  valuation  of  the  property.  Real 
estate  owned  should  be  evidenced  by  deeds,  title  policy  and 
insurance  should  be  in  force.  Overdrafts  should  not  be  of 
long  standing.  Liability  of  officers  and  directors  should  be 
investigated.  Furniture  and  fixture  account  should  not  be 
excessively  carried.  See  that  no  graft  exists  in  renting  the 
building.  Banks  sometimes  give  away  offices — for  a  pur- 
pose. Check  rents  on  bank  building,  and  ascertain  if  any 
other  money  comes  into  the  bank  and  is  not  made  part  of  the 
accounting  records.  Such  items  as  appraisals  for  real  estate 
loans  are  often  not  made  part  of  the  bank's  records.  All 
cash  that  comes  into  the  bank  should  be  recorded,  and  then 
paid  out  by  proper  authority.  Considerable  opportunity 
exists  in  little  things  to  do  petty  grafting.  Dormant  ac- 
counts should  be  investigated.  Test  interest  calculations  oc- 
casionally. Certificates  of  deposit  long  outstanding  should 
be  verified.  Partial  payments  should  be  endorsed  on  the 

sCharles  W.  Reihl  in  The  Banker*  Magazine. 


866  THE    PRACTICAL  WORK   OF   A   BANK 

stub,  or  better,  old  certificates  should  be  cancelled  and  new 
ones  issued.  Verify  cashier's  checks  in  the  same  manner. 
Verify  certifications.  Verify  margins  on  warehouse  loans. 
Check  back  last  published  statement.  Look  over  the  minute 
book.  See  that  it  is  properly  kept.  See  if  there  are  any 
excessive  lines  of  credit.  Are  any  advances  made  on  the  se- 
curity of  the  stock  of  the  institution?  Are  the  officers  and 
clerks  sufficiently  bonded?  Are  meetings  well  attended? 
Does  the  bank  earn  what  it  claims  to  earn?  Banks  have  been 
known  to  report  impossible  earnings.  Are  the  premises 
properly  protected,  vaults  and  safes  modern,  and  other  safe- 
guards taken?  Do  the  minutes  provide  for  help  without 
calling  a  special  meeting  of  the  board?  Are  the  books  al- 
ways in  balance?  Are  shortages  frequent?  Are  the  officers 
careful  about  the  little  things  of  the  bank?  Are  interest 
computations  properly  checked  by  another  clerk?  Are  sup- 
plies safeguarded,  such  as  pass-books  and  loose  leaf  sheets? 

To  give  a  general  idea  of  how  a  bank  should  be  conduct- 
ed in  regard  to  some  matters,  the  Comptroller  of  the  Cur- 
rency requires  the  following  information : 

Directors — Opposite  the  name  of  each  director  enter 
full  amount  of  all  paper  in  bank  upon  which  his  name  (in- 
dividual or  firm)  appears  as  maker,  indorser,  or  guarantor, 
but  where  two  or  more  directors  are  liable  on  the  same  paper, 
deduct  from  the  total  the  duplicate  liabilities,  so  as  to  show 
the  net  liabilities  of  all  directors.  Give  the  postoffice  address 
of  each  director,  his  occupation  and  estimated  worth  and  the 
number  of  shares  held  by  him.  State  how  often  directors 
meet  as  board;  whether  they  authorize  or  approve  loans  and 
discounts;  in  what  form  such  approval  is  recorded;  whether 
they  have  an  active  discount  committee;  whether  they  have 
an  active  examining  committee ;  whether  loans  and  discounts 
to  their  firms  and  corporations  are  specially  acted  upon  by 
the  board;  whether  the  records  show  the  directors  who  ap- 
prove excessive  loans.  Ascertain,  if  possible,  whether  any 
director  has  become  disqualified  by  hypothecation  of  stock; 
how  often  non-resident  directors  and  officers  meet  with  the 
board. 

Officers  and  Employees — State  the  liability  of  each  as 
payer,  endorser  or  guarantor  of  any  paper  held  by  the  bank, 
the  amount  of  salary,  bond,  and  whether  engaged  in  any 
other  occupation.  Give  number,  aggregate  salaries,  etc.,  of 


EXAMINATIONS  AND  AUDITS  867 

employees  below  the  grade  of  teller  and  bookkeeper.  State 
whether  official  bonds  are  in  force ;  in  whose  custody  lodged ; 
who  keeps  the  individual  ledger ;  who  balances  the  pass-books 
and  when  last  balanced;  whether  compared  by  some  one 
else;  whether  any  employee  receives  deposits  and  makes  en- 
tries in  the  individual  ledger;  who  keeps  the  general  ledger; 
who  reconciles  bank  balances;  whether  they  are  verified  by 
some  one  else. 

Books  and  Accounts — State  how  often  general  ledger  is 
balanced ;  what  form  of  individual  ledger  is  used,  give  forms 
of  savings  department  and  inactive  ledgers;  how  often  bal- 
anced; how  often  loans  and  discounts  are  verified;  how  often 
accounts  with  correspondent  banks  are  reconciled;  to  what 
extent  the  envelope  or  statement  system  is  used  for  depos- 
itors' accounts;  how  are  certificates  of  deposit  proved,  and 
how  often;  how  are  paid  certificates  filed;  are  canceled  cer- 
tificates and  drafts  properly  filed;  are  pass-books  balanced 
frequently  and  noted  on  ledger;  are  proper  entries  made  in 
redemption  fund  and  circulation  accounts  ? 

Loans  and  Discounts — The  loans  and  discounts  and 
other  securities  must  be  carefully  verified  and  every  dis- 
crepancy noted.  Give  the  total  amount  of  loans  and  dis- 
counts and  list  separately  the  amount  of  bad  debts  as  de- 
fined in  the  National  Bank  Act  and  other  overdue  paper 
itemizing  doubtful  items  and  losses.  Itemize  the  loans  ex- 
ceeding the  limit  prescribed  by  the  bank  act,  showing  the 
names  of  the  borrowers,  the  value  of  pledged  securities  and 
the  financial  standing  of  makers  and  indorsers.  Give  the 
name,  amount  and  security  of  excessive  lines  of  accommo- 
dation to  one  individual  or  interest,  or  affiliated  individuals 
or  interests.  Include  notes,  bonds,  stocks,  and  other  forms 
of  credit.  If  any  portion  of  these  lines  constitutes  an  ex- 
cessive loan,  it  should  also  be  shown.  State  genera]  char- 
acter of  loans;  whether  well  distributed;  general  character 
of  collaterals;  whether  corporations  or  enterprises  in  which 
directors  or  officers  are  interested  borrow  to  an  undue  ex- 
tent; any  large  liability  of  director  or  officer  as  maker  or 
indorser — describe  fully.  State  whether  all  paper  claimed 
by  the  bank  as  its  property,  including  collateral,  is  properly 
indorsed  or  assigned  to  it,  and  all  mortgages  properly  re- 
corded; give  current  rate  of  interest  obtained.  Itemize 
losses;  does  the  bank  place  paper  with  other  banks  and  to 


868  THE    PRACTICAL  WORK   OF    A   BANK 

what  extent;  are  they  liable  in  any  way;  do  they  take  loans 
to  accommodate  other  banks  and  to  what  extent;  is  sending 
bank  in  any  way  liable;  list  loans  secured  by  other  national 
bank  stock,  when  the  borrower  is  an  officer  or  director  in 
the  bank  whose  stock  he  puts  up.  Give  list  of  doubtful 
paper  other  than  previously  itemized  under  past  due  and  bad 
debts;  include  doubtful  real  estate  paper.  State  the  aggre- 
gate amount  on  which  real  estate  security  has  been  taken 
for  debts  previously  contracted,  and  the  amount  on  which 
real  estate  security  has  been  taken  in  violation  of  law.  Give 
the  amount  of  real  estate  owned  other  than  the  banking 
house,  listing  separately  the  amount  taken  for  debts  previ- 
ously contracted  and  the  amount  acquired  in  violation  of 
law. 

Bonds,  Securities,  etc. — Enter  number  of  shares  of  stock 
or  face  value  of  bonds,  and  state  whether  bonds  or  stocks. 
Give  name  of  corporation  issuing  stocks,  bonds,  etc.,  amount 
at  which  carried  on  books,  estimated  actual  market  value. 
State  whether  taken  for  "debts  previously  contracted,"  or 
otherwise,  and  if  interest  or  dividends  are  not  regularly  paid, 
etc.  Indicate  those  loaned  or  pledged  in  any  way.  If  val- 
uable assets  of  this  class  are  charged  off,  list  them. 

Overdrafts — (Overdrafts  are  regarded  as  loans.)  — 
State  whether  habitually  granted  and  what  amount  is  un- 
secured. Verify  amount  at  date  of  examination  and  com- 
pare amount  stated  in  last  report  of  condition  with  amount 
shown  by  the  books  for  same  date.  List  those  remaining  in 
bank  six  months  or  longer.  Itemize  overdrafts  of  officers 
and  directors  and  state  whether  habitual.6 

Banking  House — State  whether  suitable  and  convenient ; 
for  what  other  purpose  used;  whether  carried  at  fair  value 
on  books;  whether  insured;  if  deed  is  in  name  of  bank; 
whether  vault  and  safe  are  good  and  secure;  whether  bank- 
ing room  is  used  by  any  other  banking  institution;  whether 
furniture  and  fixtures  are  worth  book  value;  give  assessed 
valuation  and  gross  rental. 

Cash  Items — Describe  any  irregular  items  and  itemize 
losses  estimated. 

Reserve — Is  an  exactly  daily  record  kept  of  the  different 
kinds  of  money  on  hand?  (1)  Is  total  reserve  sufficient? 

6By  a  recent  ruling  of  the  Comptroller  overdrafts  are  forbidden. 


EXAMINATIONS  AND  AUDITS  869 

(2)  Is  reserve  in  bank  sufficient?  (3)  Was  the  average  re- 
serve for  the  last  thirty  days  in  the  bank  sufficient,  if  not, 
what  was  the  percentage?  (4)  Was  the  average  reserve  for 
the  last  thirty  days  with  agents  sufficient;  if  not,  what  was 
the  percentage? 

Capital  Stock — State  whether  stock  certificate  book  is 
properly  kept;  whether  surrendered  certificates  are  proper- 
ly assigned,  cancelled  and  attached  to  stubs;  whether  any 
stock  certificates  are  signed  in  blank;  whether  stock  ledger 
is  properly  kept;  whether  amount  of  stock  outstanding  was 
verified;  whether  bank  owns  any  shares  of  its  own  stock, 
and  if  so,  how  and  when  acquired;  whether  bank  holds  any 
shares  of  its  own  stock  as  collateral,  and  if  so,  how  acquired. 

Affiliated  Bank — (1)  State  whether  there  is  an  affilia- 
tion with  any  State  bank,  savings  bank,  or  trust  company 
through  a  controlling  ownership  of  stock  by  the  same  share- 
holders, by  practically  the  same  management,  or  in  any 
other  manner,  giving  name  of  affiliated  bank.  ( 2 )  If  trans- 
fer of  certificates  of  stock  of  the  national  bank  transfers 
ownership  of  stock  of  the  affiliated  bank,  state  that  fact.  (3) 
State  whether  stock  of  affiliated  bank  owned  by  sharehold- 
ers of  national  bank  is  held  by  them  individually  or  as  a  cor- 
poration. (4)  State  whether  stock  of  affiliated  bank  is  trus- 
teed for  benefit  of  shareholders  of  national  bank.  (5)  State 
whether  any  director  or  other  officer  is  an  officer  of  any 
other  bank. 

Dividends  and  Surplus — Give  date  of  last  dividend 
rate  and  amount  and  state  whether  semi-annual  or  other- 
wise; state  amount  carried  to  surplus.  State  reason,  if  any, 
why  bank  should  not  declare  a  dividend  at  end  of  current 
dividend  period ;  whether  you  compared  bank's  last  report  of 
earnings  and  dividends  with  the  amount  of  profits  shown  by 
its  books  at  same  date;  whether  interest  paid  is  deducted 
from  gross  earnings  and  whether  any  profits  are  irregularly 
carried  on  the  individual  ledger,  in  special  accounts,  or 
charged  off  the  books.  Is  itemized  expense  account  kept 
and  did  you  examine  that  account  to  date  of  previous  ex- 
amination? Did  you  examine  earnings? 

Due  from  Reserve  Agents,  Trust  Companies,  Banks  and 
Bankers — State  what  rate  of  interest  received  on  balances 
and  whether  certificates  of  deposit  issued  by  other  national 
banks  are  secured  by  collateral.  List  reserve  balances. 


370  THE   PRACTICAL  WORK   OF   A   BANK 

Due  to  Reserve  Agents,  Trust  Companies,  Banks  and 
Bankers — State  whether  amounts  due  are  on  open  account 
or  on  demand  or  time  certificates  of  deposit;  whether  they 
are  secured  by  collaterals  and  rate  of  interest  paid.  (For- 
ward report  promptly  without  awaiting  verification.)  List 
reserve  balances. 

Individual  Deposits — State  rate  of  interest  paid;  wheth- 
er a*  proper  record  of  all  certificates  of  deposit,  cashier's 
checks,  and  certified  checks  issued  is  regularly  kept  in  a 
book  for  that  purpose,  and  give  rate  of  interest.  If  bank 
conducts  "savings  department,"  give  method  of  verifying 
pass-books  and  rate  of  interest.  State  whether  previous  no- 
tice of  deposit  withdrawals  are  provided  for.  If  bank  holds 
State,  county,  municipal,  insular  possession,  or  any  very 
large  balances  subject  to  check,  give  list  and  rate  of  inter- 
est paid.  Give  total  of  inactive  ledger.  State  whether  sur- 
rendered certificates  are  properly  cancelled  and  filed  in 
numerical  order  for  auditing.  State  whether  properly 
audited  by  this  method. 

Rediscounts  and  Borrowed  Money — List  amounts  of 
money  borrowed,  whether  on  bills  payable,  rediscounts,  open 
accounts,  certificates  of  deposit,  bonds,  or  otherwise,  and 
state  where  borrowed  and  date,  interest  rate,  date  of  ma- 
turity, security,  whether  all  liabilities  are  shown  on  books, 
whether  authorized  by  the  board  of  directors,  whether  bank 
borrows  habitually. 

Recapitulation — Recapitulate  the  following  resources, 
showing  whether  doubtful,  or  indicating  loss.  Give  the  esti- 
mate value  of  assets  in  each  class  not  shown  on  the  books. 
Bad  debts,  other  overdue  paper;  all  other  loans  and  dis- 
counts, overdrafts,  premiums  on  United  States  bonds,  bonds, 
securities,  etc.,  banking  house,  furniture  and  fixtures,  other 
real  estate,  cash  items.  Show  the  total  amount  of  surplus 
and  profits  less  taxes,  expenses,  etc. 

General  Remarks  as  to  Condition  of  Bank — Summarize 
matters  to  which  special  attention  should  be  called.  Include 
certificate  relative  to  solvency,  by-laws,  management,  and 
condition  of  books.  Was  a  meeting  had  with  the  board  of 
directors?  Were  all  matters  subject  to  criticism  considered 
with  them?  What  elements  of  danger  are  in  the  bank?7 

TWith  acknowledgment  to  pamphlet  on  "Bank  Accounting"  issued  by  the 
American  Institute  of  Banking, 


CHAPTER  XIII. 
THE  ESSENTIALS  IN  GRANTING  CREDIT 

THE  NATURE  AND  FUNCTIONS  OF  CREDIT 

Credit  is  the  life-blood  of  business,  one  of  the  "essential 
elements"  in  banking  and  finance.  Without  it,  the  present 
high  state  of  business  would  not  have  come  to  pass,  nor  could 
it  long  continue.  Credit  constructs  railroads,  opens  mines, 
spans  rivers,  paves  streets,  improves  farms,  builds  homes, 
moves  the  commerce  of  the  country  and  wages  war. 
"Credit,"  says  Webster,  "has  done  more  a  thousand  times 
to  enrich  the  nations  than  all  the  mines  in  the  world." 

Credit  transfers  large  sums  cheaply.  It  employs  capi- 
tal productively.  It  enlarges  a  man's  earning  powers,  and 
through  its  use  the  lender  and  borrower  meet  to  their  mu- 
tual profit.  Credit  is  a  far  better  instrument  of  production 
than  an  equal  quantity  of  coined  money ;  for  while  money  is 
an  indispensable  denominator  of  prices,  and  the  medium  of 
the  smaller  exchanges,  credit  is  the  instrument  of  larger  ex- 
changes, and  larger  production.  Moreover,  as  an  instru- 
ment, it  is  economically  costless  and  not  like  money  with  a 
commodity  value  and  expensive. 

CREDIT  IN  ECONOMICS 

In  political  economy,  credit  is  power  to  borrow;  the 
ability  to  command  capital.  As  nature  abhors  a  vacuum, 
so  capital  abhors  idleness,  and  it  rapidly  and  automatically 
seeks  profitable  employment.  Where  the  credit  system  is 
highly  developed,  active  and  profitable  demand  for  capital 
exists.  Where  credit  is  undeveloped,  we  shall  find  business 
still  in  a  crude  state,  wages  small,  and  finances  generally  in 
an  unsatisfactory  condition. 

CREDIT  IN  LAW 

In  law,  credit  is  the  present  right  to  a  future  payment; 
the  right  to  demand  something  from  some  one  at  a  stated 

371 


872  THE    PRACTICAL  WORK  OF   A   BANK 

time.  Thus,  when  a  bill  of  goods  is  sold,  the  legal  title 
passes  to  the  buyer,  and  the  seller  simply  holds  the  right  to 
collect  the  equivalent  at  the  time  and  place  appointed.  He 
can  retake  the  goods  only  under  certain  conditions,  and  his 
principal  right  is  one  of  settlement.  He  can  sell  this  right 
and  the  holder  in  due  course  will  have  good  title  to  this  right 
of  enforcement. 

CREDIT  IN  BUSINESS 

In  banking  and  business,  credit  is  the  estimate  of  the 
ability  and  willingness  of  an  individual,  firm  or  corporation 
to  meet  their  business  engagements.  This  estimate  was  for- 
merly based  chiefly  upon:  (1)  Reputation;  (2)  capital.  But 
with  the  advent  of  the  mercantile  agency  and  the  credit  de- 
partment, a  more  accurate  and  trustworthy  basis  of  credit 
has  been  formed,  thus:  (a)  A  closer  examination  as  to  the 
character  of  the  man  and  the  business;  (b)  total  net  worth, 
the  element  of  contingent  liabilities  being  given  due  con- 
sideration; (c)  other  facts  bearing  upon  the  probability  of 
the  success  or  the  failure  of  the  enterprise. 

The  basis  of  all  such  credit  is  confidence.  In  fact,  every 
modern  financial  system  is  built  upon  confidence,  and  our 
whole  financial  structure  has  become  a  system  of  credit 
clearings — a  system  of  substituting  the  token  of  confidence 
for  the  payment  in  money.  This  confidence  must  not  only 
assure  that  a  man  is  willing,  but  is  also  able  to  meet  his  en- 
gagements; not  only  able,  but  also  willing.1 

THE  FIELD  or  CREDIT  BROAD 

The  field  of  credit  is  an  inexhaustible  one,  and  the  last 
word  has  yet  to  be  said.  Like  all  other  subjects,  it  has  two 
sides — the  theoretical  and  the  practical.  To  apply  the 
theory  is  as  important,  if  not  more  so,  than  to  understand  it. 
Much  has  been  said  and  written  concerning  credit  in  the 
abstract  and  much  in  the  concrete,  but  the  trouble  has  been 
that,  as  a  rule,  application  has  been  made  of  broad  rules  and 
principles — so  broad  that  their  definite  application  has  been 
difficult  for  the  beginner  to  understand. 

iFrom  the  "Essentials  In  Granting  Credit"  by  the  author.  Awarded  the 
Cannon  Prize,  New  York  Chapter,  American  Institute  of  Banking,  September, 
1911. 


ESSENTIALS    IN    GRANTING    CREDIT 


878 


Credit  is  no  longer  granted  on  mere  personal  acquaint- 
ance with  the  borrower  and  his  business,  but  upon  his  state- 
ment of  condition.  The  use  of  commercial  paper  as  a  bank 


TO  CITIZENS  BANK  OF  BUFFALO 


Location* 


Business  _ . 

For  the  purpose  of  procuring  credit  from  lime  to  time,  borrowing  money  and  obtaining  discounts  bom  you,  the  undersigned  declare  the 
following  to  be  an  accurate,  true  and  full  statement  of  the  financial  condition  of  the  undersigned  on  . 

191 ,  understanding  that  the  officers  of  the  bank  in  •granting  said  credits  rely  upon  the  accuracy  of 

this  statement. 

If  at  any  time  the  condition  of  the  undersigned  should  be  materially  changed,  notice  will  be  given  you  immediately,  in  writing,  staling  the 
nature  of  such  changed  condition,  and  in  the  event  of  not  doing  so  it  shall  be  evidence  that  the  condition  is  unchanged. 

If  any  judgment  shall  be  entered  against  the  undersigned  or  the  undersigned  should  become  financially  embarrassed,  all  obligations  of  what- 
soever name,  kind  or  nature  held  by  you  from  the  undersigned  shall,  at  your  option,  be  and  become  due  immediately,  notwithstand- 
ing the  date  of  payment  as  fixed  by  the  obligation  then  held  by  you. 

RESOURCES 


Total  value  Personal  Property, 


REAL  ESTATE 


LIABILITIES 




Rill,  payable                                                                                    t 

Total  Liabilities, 
Total  worth  In  and  out  of  business. 


Have  yon  PAST  DUE  indebtedness? ,. 

If  so.  designate  item  and  the  amount. 
Please  list  real  estate  in  detail  on  other  side. 


CREDIT   STATEMENT — INDIVIDUALS 


investment  has  become  more  common  as  its  worth  has  be- 
come better  known,  so  that  to-day  it  forms  a  large  part  of 
the  assets  of  our  commercial  banks. 


25 


374  THE    PRACTICAL  WORK   OF    A   BANK 

To  properly  judge  the  quality  of  the  paper,  dependence 
must  be  placed  on  the  statement,  and  it  is  necessary  to  ana- 
lyze the  statement  of  condition  correctly.  To  do  this  re- 
quires experience.  Here  the  theory  is  applied.  And  any 
bank  man  who  expects  to  make  safe  loans  must  be  able  to 
judge  a  credit  statement.  It  is  not  enough  that  the  city 
correspondent  recommends  the  paper — it,  too,  may  be  mis- 
taken in  its  opinion,  or  biased  in  its  judgment.  Nor  is  it 
enough  that  other  banks  have  found  it  satisfactory,  impor- 
tant as  this  may  be  as  corroborative  of  present  opinion.  The 
banker  should  be  able  to  do  this  for  himself. 

CREDIT  A  SCIENCE 

In  so  far  as  the  principles  of  credit  have  been  worked 
out,  systematized,  clearly  expressed  and  carefully  applied, 
the  granting  of  credit  may  be  said  to  be  a  science.  While 
not  so  exact  as  some  sciences,  such  as  mathematics,  yet  the 
fundamental  principles  are  now  generally  recognized  in  all 
credit  circles.  Thus,  it  is  accepted  that  character,  capacity 
and  capital  are  necessarily  present  in  some  degree  in  every 
credit  operation;  and  while  the  proportion  may  differ,  yet 
they  must  exist.  To  ascertain  if  they  exist  and  in  a  safe 
degree  is  the  work  of  the  credit  man.  To  determine  the 
degree  and  the  consequent  safety  of  the  loan  based  upon 
such  analysis  is  to  grant  sound  credit;  to  misjudge  the  qual- 
ity of  the  credit  is  to  make  unsound  loans  and  invite  loss. 

CREDIT  is  OLD 

Credit  is  old — older  perhaps  than  the  instruments  which 
represent  credit.  It  is  conceivable  that  primitive  man  trust- 
ed primitive  man  with  goods,  upon  a  promise  to  return  01 
repay  in  kind  or  in  value.  The  evidence  would  be  parol  and 
not  documentary,  but  the  element  credo — to  believe — was 
present  nevertheless. 

Credit  instruments  are  of  sufficient  age  to  prove  the  an- 
tiquity of  even  the  documents  of  credit,  there  being  in  exist- 
ence at  the  present  time  perfectly  preserved  credit  instru- 
ments dating  back  to  2500  B.  C.2 

21n  the  Metropolitan  Museum  of  Art  in  New  York  will  be  found  Babylonian 
promissory  notes  on  clay  tablets,  dating  back  to  2500  B.  C.,  in  a  perfect  state  of 
preservation. 


ESSENTIALS    IN    GRANTING    CREDIT  875 

CREDIT  A  FINE  PIECE  OF  MECHANISM 

Credit  is  a  fine  piece  of  mechanism.  It  works  silently 
and  smoothly  most  of  the  time ;  but  when  it  is  thrown  out  of 
gear,  it  disrupts  the  whole  commercial  structure.  Ordi- 
narily large  sums  are  easily  and  cheaply  transferred  from 
place  to  place,  country  to  country;  enormous  shipments  of 
merchandise  are  bought  and  paid  for,  and  the  operations  of 
trade  and  commerce  move  without  a  hitch;  but  once  the 
credit  system  goes  wrong,  the  whole  fabric  feels  the  shock. 

In  the  collapse  of  the  credit  machine  due  to  the  late 
war,  new  problems  confronted  the  business  world.  It  was 
necessary  to  devise  other  ways  and  means  to  promote  credit 
transfers.  The  credit  instruments  in  the  hands  of  travellers, 
which  ordinarily  were  accepted  as  cash  everywhere  because 
of  the  smooth  working  of  the  credit  machine,  were  practi- 
cally worthless  for  ordinary  purposes.  Gold  had  to  be  sent 
abroad  to  redeem  the  instruments  which,  under  normal  con- 
ditions, transfers  of  credit  would  have  accomplished.  The 
established  order  of  things  had  to  give  way  to  new  ideas  to 
meet  new  conditions.  In  this  country  new  forms  of  bank- 
notes and  clearing-house  certificates  appeared,  based,  not  on 
gold,  in  whole  or  in  part,  but  upon  commercial  paper.  Thus 
credit  was  piled  upon  credit,  to  keep  the  wheels  of  industry 
from  breaking  down  entirely.  And  it  worked  perfectly. 

CREDIT  A  TRANSFER 

Credit  is  a  transfer — or  rather  it  arises  out  of  a  trans- 
fer. All  credit  is  based  upon  a  transfer  of  property.  With- 
out the  interchange  of  property  credit  cannot  exist.  I  may 
trust  a  man,  but  for  what?  My  trust  is  merely  good 
opinion.  It  is  a  compliment  to  him,  but  of  no  use  until  I 
trust  him  with  something.  Then  it  takes  tangible  form  and 
out  of  the  transfer  true  credit  arises.  I  trust  him  to  return 
the  article  or  the  value  at  the  appointed  time,  and  I  have 
given  him  credit.  I  have  confidence  in  him,  and  this  con- 
fidence expressed  in  a  transfer  is  credit. 

Credit  depends  upon  an  exchange  and  time.  Something 
of  value  must  be  exchanged  for  a  promise  to  pay  at  a  time 
certain  to  arrive.  If  goods  are  sold  for  cash,  no  credit  en- 
ters. Trust  or  confidence  may  arise  as  to  the  quality  of  the 


876 


THE   PRACTICAL  WORK  OF   A   BANK 


goods,  the  weight  or  measure;  but  this  is  a  different  sort  of 
credit  than  that  we  are  dealing  with.  The  payment  must 
be  deferred  if  the  credit  element  is  to  enter. 


TO  CITIZENS  BANK  OF  BUFFALO 


Name  {Firm  style) _,.--.,««, 


OBJIIJfJJ  _„,„. ,..., 

Location 


.Branches. 


For  lh«  purpose  of  procuring  credit  from  lime  to  time,  borrowing  money  and  obtaining  discounts  from  you,  the  undersigned  declare  ike 
following  to  br  an  accurate,  true  and  full  statement  of  the  financial  condition  of  the  undersigned  ««  . . 

,  L  lo1  understanding  that  the  officers  of  the  bank  in  granting  laid  credit*  rely  upon  the  accuracy  of 

this  statement. 

If  *t  any  time  the  condition  of  the  undersigned  should  be  materially  changed,  notice  will  be  given  you  immediately,  in  writing.  Mating  the 
nature  of  such  changed  condition,  and  in  the  event  of  not  doing  so  it  shall  be  evidence  that  the  condition  is  unchanged. 

If  any  judgment  shall  be  entered  against  the  undersigned  or  the  undersigned  should  become  financially  embarrassed,  all  obligations  of  what- 
soever name,  kind  or  nature  held  by  you  from  the  undersigned  shall,  at  your  option,  be  and  become  due  immediately,  notwithstand- 
ing the  date  of  payment  as  fixed  by  the  obligation  then  held  by  you. 

ASSETS  LIABILITIES 


Cash  in  Citizens  Bank  of  Buffalo..  „._ — 

Cash  in  other  Banks... 

Bills  Receivable  'from  Customers,  (good) 

Accounts  Receivable  from  Customers,  (good) 

Accounts  and  Bills  Receivable. due  from  Partners... 

Accounts  and  Bills  Receivable,  doubtful , 

Merchandise  finished  (how  valued) 

Merchandise  unfinished    how  valued) 

Raw  material  'how  valued). 

Real  Estate  in  fee  belonging  to  Firm 
Real  Estate  in  fee  belonging  to  Partners 

individually .• 

Machinery  and  fixtures ,. 

Building! - 

*• 


TOTAl 


Bills  Payable,  for  Merchandise. 

Direct  Loan  from  Citizen!  Bank  of  Buffalo.. 

Direct  Loan  from  other  Banks 

Bills  Payable  to  others. 


Bills  Receivable,  discounted 

Open  Accounts,  past  due 

Mortgage  or  Lien  on  Real  Estati 
Chattel  Mortgage  or  other  Lien! 
Honey  Deposited  with  us.. 


Total  Liabilities 


Net  Worth. 


Please  list  real  estate  in  detail  on  ether  aide. 

modations  on  Endorsements 
itees  on  Bonds., 


Contingent      ) 
Liability   I 

'  Accommodation  Paper  Outstanding  , 

Do  you  pledge,  sell  or  otherwise  dispose  of  any  of  jour  accounts  receivable  ? 
If  so,  to  what  extent  an  any  of  the  accourts  in  above  statement  so  disposed  of? 

Date  and  Expiration  of  Partnership . When   was  Business  Established 

Special  Partners  .... _ ,.,. _ _»_ u.__,_.For  what  Period  and  An 

Worth  of  Partners  outside  of  Items  scheduled  ->"—  a  , 

Salei  for  year  ending. „ „ „      ,  n,  _,„  r-      r  .——... 

Average  terms  of  sale Amount  of  rent  paid  per  annum  -., „, .. , 

Anioonta  charged  off  for  depreciation  and  bad  debt* ,. , , 


An  account!  insured,  and  if.  jo,  in  what  Company  ? 


Machinery  .  and    Fixtures 


CREDIT   STATEMENT — F1BM 


In  the  eyes  of  the  law  a  contract  is  a  sacred  thing.  It 
surrounds  a  promise  with  all  its  powerful  legal  machinery, 
to  protect  the  rights  and  enforce  the  liabilities  of  the  parties. 


ESSENTIALS    IN    GRANTING    CREDIT  877 

And  credit  instruments  being  contracts,  find  the  strong  arm 
of  the  law  raised  in  their  behalf,  to  enforce  them  according 
to  their  terms. 

CREDIT  A  LAWFUL  RIGHT 

Credit  is  a  lawful  right.  If  I  have  a  negotiable  instru- 
ment payable  to  me,  I  can  sell  this  instrument,  and  thereby 
transfer  my  right  to  receive  payment  to  another.  This  is 
called  negotiation,  and  the  element  of  transfer  by  indorse- 
ment, negotiability.  If  I  sell  a  man  a  bill  of  goods  on  open 
account,  I  can  sell  this  account,  and  vest  in  the  buyer  all 
my  rights  to  collect  from  the  debtor.  In  some  cases  the 
indorsee  of  a  negotiable  instrument  will  have  better  rights 
than  the  original  party.  Anything  which  I  own  I  can  sell. 
Credit,  therefore,  is  bought  and  sold  like  other  commodities 
because  of  its  standing  in  law. 


CREDIT  is  CAPITAL 

Credit  is  power  to  borrow.  And  the  power  to  borrow  is 
capital;  therefore,  credit  is  capital.  It  is  reasonable  to  con- 
clude that  if  I  have  $10,000  in  cash  and  can  borrow  $30,000 
more,  the  $30,000  is  as  effective  for  capital  purposes  as  if  it 
were  all  my  own,  except  that  the  loan  might  be  called  at  a 
time  when  not  convenient  to  repay;  but  when  employed  it  is 
capital  in  my  hands.  The  industries  of  the  world  are  car- 
ried on  through  borrowed  capital — capital  assembled  in  pri- 
vate hands  and  in  banks,  and  then  loaned  to  those  who  can 
best  employ  the  assembled  funds.  And  when  in  the  bank 
the  credit  which  the  owner  transfers  to  the  bank  becomes 
loanable  in  larger  proportion,  so  that  banking  credit  becomes 
capital  to  those  who  can  offer  necessary  proof  of  character, 
capacity  and  capital  to  employ  the  credit  profitably.8 

•There  is  some  dispute  as  to  whether  credit  is  or  is  not  capital.  It  is  at 
least  equivalent,  in  its  effect,  to  capital.  While  it  may  not  increase  the  amount 
of  capital,  it  transfers  capital  from  one  having  idle  funds  to  one  who  can  use 
them  at  a  price.  It  makes  unproductive  capital  productive.  And  in  the  accept- 
ance form  of  credit,  it  does  not  even  involve  the  use  of  funds,  nor  does  the  capi- 
tal fund  need  to  be  in  existence  when  the  credit  is  extended.  Acceptance  credit 
involves  pure  credit,  and  capital  only  remotely,  and  when  so  used,  is  capital. 


378 


THE    PRACTICAL   WORK   OF    A    BANK 

CREDIT  AN  ASSET 


Credit  is  an  asset.    If  I  have  a  promise  which  I  am  rea- 
sonably sure  of  being  fulfilled,  I  may  contract  other  prom- 


TO  CITIZENS  BANK  OF  BUFFALO 

Name  (  Corporate  style  under  charter) 

Business - - — ._,_ ~ - — — 

Location , Branches.— — • * 

For  the  purpose  of  procuring  credit  from  time  to  time,  borrowing  money  and  obtaining  discounts  from  you,  the  undersigned  declare!  the 
following  to  be  en  accurate,  true  and  full  statement  of  the  financial  condition  of  the  undersigned  on — 

191 ,  understanding  that  the  officers  ol  the  bank  in  granting  said  credit!  rely  upon  the  accuracy  of 

this  statement. 

If  at  any  time  the  condition  of  the  undersigned  should  be  materially  changed,  notice  will  be  given  you  immediately,  in  writing,  stating  the 
nature  of  such  changed  condition,  and  in  the  event  ol  not  doing  so  it  shall  be  evidence  that  the  condition  is  unchanged. 

If  any  judgment  shall  be  entered  against  '  .e  undersigned  or  the  undersigned  should  become  financially  embarrassed,  all  obligations  of  what- 
soever name,  kind  or  nature  held  by  you  from  the  undersigned  shall,  at  your  option,  be  and  become  due  immediately,  notwithstand- 
ing the  date  of  payment  as  fixed  by  the  obligation  then  held  by  you. 

ASSETS  LIABILITIES 

Cash  on  hand | jj  BUli  Payable,  for  Merchandise 

Cash  in  Citizens  Bank  of  Buffalo Direct  Loan  from  Citizens  Bank  of  Buffalo.. 

Cash  in  other  Banks ! Direct  Loan  from  other  Banks 

Bills  Receivable  from  Customers,  (good) Bills  Payable  toothers 

Accounts  Receivable  from  Customers,  (good) |...     .• Bills  Receivable,  discounted 

Accounts  and  Bills  Receivable,  due  from  Officers.  ..] i Open  Accounts,  not  due 

Accounts  and  Bills  Receivable,  doubtful ; Open  Accounts,  past  due 

Merchandise  finished  (how  valued) ' Mortgage  or  Lien  on  Real  Estate 

Merchandise  unfinished  (how  valued) I ' i  Chattel  Mortgage  or  other  Liens 

Raw  material  (how  valued) ' • i  Bonded  Debt 

""'  E(M"ket°v3ue°)f  Corponltion  :  Interest  Due  on  Bonded  Debt 

Machinery  and  firtures Money  Deposited  with  us. ... 

Balance  due  for  stock  subscription 

Treasury  stock |j j 1,1 

Treasury  bonds ;! f  1  * 

Good  will  and  patents j |     * 

J 1  Total  Liabilities 

Capital 

|  J  '  Surplus,  including  undivided  profits 

TOTAI. ..! I ' TOTAL 

I  i ^__________ 

Co°lin«™'     J  Gmrantees  on  Bond. 
Liability  j 

'  Accommodation  Paper  OvUtanding _ 

Sales  for  year  ending Average  terms  ot  sale... 

Amount  of  rent  paid  per  annum _.._ Are  accounts  insured,  and  if  to.  in  what  Company? 

Do  you  pledge,  sell  or  otherwise  dispoae  of  any  of  your  accounts  receivable  ?. *-. 

If  so,  to  what  ettent  are  any  of  the  accounts  in  above  statement  so  disposed  of? - 

PLEASK  GIVE  PARTICULARS  OF  EACH  PARCEL  OF  REAL  ESTATE  OWNED  BY  CORPORATION. 

and  Nnnba  Gty « To*,  .rd  StaK          T«|«  in  N.»«  ol         EttnMed  V.liK          Moflpfts  Equiy 


CREDIT    STATEMENT CORPORATION 


ises  on  the  strength  of  receiving  that  which  is  due  to  me,  in 
time  to  pay  that  which  I  owe.  And  in  that  confidence  busi- 
ness moves.  It  is,  when  smoothly  running,  as  effective  to 


ESSENTIALS    IN    GRANTING    CREDIT  379 

keep  the  wheels  of  commerce  moving  as  gold;  and  its  cost 
is  cheaper.  One  dollar  of  credit  will  do  the  work  of  four  in 
money,  and  do  it  just  as  well.  It  is  intangible,  yet  tangible. 
It  cannot  be  seen,  yet  is  powerful.  Like  electricity,  its  force 
may  be  seen  by  its  effectiveness.  It  is  the  "silent  partner" 
of  business. 

CREDIT  is  REPUTATION 

Credit  is  reputation.  A  man  may  have  a  very  good 
name  and  yet  have  no  credit,  for  credit  is  due  to  business 
character.  And  business  character  is  simply  reputation  for 
promptness,  square  dealing,  efficiency.  It  is  not  moral  char- 
acter, however  important  that  may  be;  for  some  men  whose 
moral  character  is  undoubtedly  bad  may  have  a  high  sense 
of  business  honesty  and  build  up  an  enviable  reputation  in 
business  circles.  And  on  the  contrary,  a  man  may  be  ever  so 
good,  say  long  prayers  and  be  however  devout,  and  yet 
have  no  business  reputation  and,  therefore,  no  credit. 

CREDIT  is  WILLINGNESS 

Credit  is  willingness  to  pay  as  agreed.  It  matters  not 
how  able  a  man  may  be,  if  he  is  not  willing,  he  can  circum- 
vent the  law.  He  must  have  a  desire  to  be  honest,  a  willing- 
ness to  be  fair,  a  high  regard  for  business  ethics.  The  will- 
ing man  will  usually  find  a  way  or  make  one.  It  is  vital 
that  this  element  be  in  evidence  in  all  credit  transactions. 

CREDIT  is  ABILITY 

Credit  is  ability.  Incompetency  is  the  rock  upon  which 
many  a  business  goes  to  ruin.  It  matters  not  how  honest 
a  man  may  be,  if  he  lacks  ability,  he  cannot  succeed.  He 
must  "know  how."  The  knowing  how  may  be  an  inherent 
knowledge,  or  it  may  be  acquired.  It  may  be  a  knack,  or 
it  may  be  an  accomplishment;  but  the  "know  how"  must 
be  there,  if  the  venture  is  to  succeed.  Many  a  business  built 
up  by  long  years  of  faithful  work  has  been  left  in  prime 
condition  to  a  family  only  to  be  wrecked  because  the  father's 
ability  did  not  descend  to  the  son,  and  the  son  could  not  see 
that  it  was  necessary  to  develop  ability  or  to  buy  it. 


380 


THE   PRACTICAL  WORK  OF   A   BANK 

CREDIT  is  RESOURCES 


Credit  is  resources.  It  is  axiomatic  that  if  a  man  would 
pay,  he  must  have  the  wherewithal.  He  cannot  pay  a  prom- 
ise with  a  promise — for  long ;  and  unless  back  of  the  promise 


Incorporated  under  LAWS  of. „.„.., Prt*....-.,..m..-m^ur-»^JI,J».Ju...^...T...C'""'"*»c'*J  business 

Authorized  Capital —__„*_. Ptr  value  of  shares , „ subscribed Paid  fa 

How  paid  In,  Cash....... .-__„_  _ „.„......- Other  property- _ _ _ _ - -.; 

Description  of  other  property,  and  how  valued. .„._„ ™ 

What  portion  of  real  estate,  if  any,  has  been  acquired  through  bad  debta „ „ _ „.... _ ... 

In  whose  name  is  title  to  real  estate  held _ „ „ Any  mortgage  against  it _ 

Are  stockholders  liable  beyond  amount  paid  on  stock If  so,  to  what  extent _ „ 

Average  annual  business v •—-- ..—...—.,-. - Annual  expenses „ Annual  dividends  .   . 

When  was  last  dividend  declared „ - _ „ Rate 

Any  mortgage  on  real  estate,  or  other  assets  (give  particulars) .; „ ,. 

Bond  issue when  due „ _ Rate  of  interest „ „. 

Regular  time  of  taking  inventory .-. „ _ „; _ 

dive  basis  of  this  statement,  whether  inventory  or  estimate •. _.. _ „. 

What  amount  of  accounts  and  bills  receivable  not  charged  off,  is  past  due,  extended  or  renewed 

Amount  charged  off  for  bad  debts  last  year — Amount  collected  on  bad  debts  during  same  period. 

Do  you  charge  off  on  plant  annually.. „ -...How  much  last  year , 

State  last  date  of  taking  Trial  Balance _ Row  often  taken. 

Number  of  bank  accounts  and  where  kept _. _, . .... 

OFFICERS  N'HES   IN   FULL  ADDRESS 

President _ ^ 

Vice-President „..._ ....  ..... 

Secretary „._ , _., 

Please  sign  Company's  name  here  — -_._. ...._ 

.,  Ju_.i , „,,  ^  1-r-.-niri. ._.,_.. _IMJ., _, „. By „„„„ 

Address  ^ Date  signed 


DETAILS  OF   CORPORATE   AFFAIRS   FOR  CREDIT   PURPOSES — REVERSE   OF   PRECEDING  FORM 

and  the  promisor  there  is  property  that  will  turn  itself  into 
money  in  due  course,  sound  credit  cannot  arise.  This  prop- 
erty need  not  be  in  land  and  buildings,  machinery  and  fix- 


ESSENTIALS    IN    GRANTING    CREDIT  381 

tures — some  credit  men  prefer  that  it  should  not.  It  may  be 
in  rights  to  collect,  cash,  merchandise,  raw  material  and  other 
forms  of  assets,  but  it  must  exist  in  some  form,  and  that  form 
preferably  of  quick  convertibility,  so  that  the  debts  which 
are  of  short  duration  may  be  met  by  credits  of  like  duration, 
the  one  offsetting  the  other. 

CREDIT  is  CONFIDENCE 

Whatever  credit  is,  it  arises  out  of  confidence — be- 
lief— that  the  debt  will  be  paid;  confidence  that  the  trust 
will  be  fulfilled.  No  man  parts  with  property  unless  he 
expects  to  get  its  equivalent  at  the  appointed  time.  Even  in 
collateral  loans  the  credit  is  extended  first  on  the  faith  in 
the  borrower's  ability  to  pay  the  loan,  and  this  failing,  in 
the  confidence  that  the  security  will  sell  for  enough  to  reim- 
burse the  lender;  so  that  it  is  confidence  in  both  that  under- 
lies the  credit.  In  fact,  most  of  the  credit,  particularly 
banking  credit,  is  based  upon  the  latter  proposition;  for 
back  of  the  greater  part  of  banking  credit  is  value  in  some 
form.  It  may  be  stocks  and  bonds,  warehouse  receipts, 
grain,  real  estate,  merchandise,  "receivables,"  specifically 
pledged  or  not,  to  secure  the  loan;  but  upon  faith  of  ulti- 
mate redemption  in  money  the  loan  is  made. 

In  the  granting  of  credit  on  open  account,  the  confidence 
lies  in  the  ability  of  the  business  to  make  money.  And  the 
likelihood  of  making  money  is  based  upon  the  condition  of 
the  business  as  expressed  in  cold  facts.  The  ultimate  secu- 
rity lies  in  the  capital  worth  of  the  debtor,  so  that  while 
credit  is  confidence,  it  is  ultimately  based  upon  value  in  some 
form.  Just  so  soon  as  confidence  in  the  property  value  is 
lost,  credit  is  destroyed.  Witness  a  war.  As  soon  as  the 
war  clouds  begin  to  gather,  the  people  begin  to  curtail  their 
credit — their  confidence.  They  draw  upon  their  bank  ac- 
courits,  preferring  to  hold  metal  to  credit  tokens.  They  are 
fearful  that  the  credit  token  will  not  exchange  for  property, 
while  money  tokens  will.  They  fear  that  the  earning  power 
of  properties  will  be  cut  off,  and  with  earning  power  goes 
interest  and  dividends.  They  therefore  prefer  certainty  to 
credit,  and  the  credit  machine  suffers. 

But  credit  is  fundamentally  confidence.  Where  confi- 
dence is  most  fully  developed,  credit  will  be  cheap;  where 


382  THE   PRACTICAL  WORK   OF   A   BANK 

it  is  uncertain  it  is  dear.     When  it  is  lost,  credit  is  im- 
possible. 

THE  PSYCHOLOGY  OF  CREDIT 

Expressed  in  simplest  language,  credit  is,  therefore,  the 
belief  that  men  will  keep  their  engagements.  It  is  confi- 
dence that  the  promise  will  be  fulfilled.  It  matters  not 
whether  the  promise  is  one  of  a  government  to  pay  a  million 
dollars,  or  that  of  a  laborer  to  pay  the  grocery  bill  he  runs 
at  the  local  store,  the  credit  is  extended  upon  the  belief  that 
the  debt  will  be  paid. 

The  granting  of  credit  is  a  psychological  process — a 
mental  gymnastic.  From  the  facts  submitted  the  credit 
man  must  determine  the  likelihood  of  the  debt  being  paid. 
He  weighs  the  pros  and  cons  and  makes  his  decision.  He 
plays  the  role  of  the  juryman,  whose  duty  is  to  seek  the 
truth  and  apply  the  law  to  the  particular  state  of  facts. 

He  knows  men.  He  knows  business  and  business  risks. 
He  knows  the  customs  of  the  trades.  He  knows  the  condi- 
tion of  trade  and  the  condition  of  trades  at  a  particular  time. 
It  may  be,  for  instance,  that  he  has  an  application  for  credit 
from  a  suit  and  cloak  firm.  He  will  know  if  styles  have 
suddenly  changed,  leaving  manufacturers  stranded  with  an 
avalanche  of  cancelled  orders.  He  will  know  that  a  back- 
ward season  has  hurt  sales.  He  will  know  that  collections 
in  certain  sections  are  slow;  in  others  good.  In  one  part 
of  the  country  crops  may  be  good  and  money  will  be  plen- 
tiful and  cheap;  in  another  dear.  Just  now  he  must  weigh 
the  probabilities  of  a  great  war.  The  collapse  of  the  world's 
credit  machine  is  a  new  force  for  him  to  reckon  with.  He 
must  be  a  seer — one  who  sees;  a  prophet — one  who  looks 
ahead.  How  he  gets  his  information  is  the  secret  of  the 
profession. 

MENTAL  PROCESSES 

The  credit  man's  risks  are  the  outcome  of  his  mental 
processes.  He  expresses  his  hopes  and  his  fears  by  granting 
or  withholding  credit.  He  first  gets  his  facts,  then  forms  his 
conclusions,  passes  judgment  and  awaits  the  result. 

He  may  be  influenced  by  friendship,  pity,  family  ties, 
hesitance  to  say  "no" — fear.  He  may  be  inexperienced  in 
the  ways  of  men  and  a  poor  judge  of  human  nature.  He 


ESSENTIALS    IN    GRANTING    CREDIT  383 

may  be  reckless,  or  ambitious  to  build  up  a  business  or  a 
bank,  and  extend  credit  to  those  unworthy.  He  may  be  a 
poor  psychologist  and  prove  a  poor  credit  man;  but  what- 
ever the  result  of  his  labors,  every  credit  is  the  result  of  men- 
tal conclusions,  either  carefully  or  carelessly  formed. 

It  may  be  mere  hope  that  the  borrower  will  pay;  it  may 
be  knowledge  that  the  borrower  will,  in  all  human  probabil- 
ity, pay.  And  having  come  to  the  latter  decision,  he  has 
done  all  that  the  occasion  requires.  If  he  has  simply  acted 
upon  the  former  impulse,  he  has  scarcely  made  a  good  be- 
ginning. And  many  a  bank  loan  rests  upon  the  insecure 
foundation  of  hope. 

ALL  MEN  NOT  HONEST 

The  mental  exercise  through  which  the  lender  goes  be- 
fore credit  is  extended  may  be  simple  or  complex,  scientific 
or  careless,  but  follows  one  of  four  general  lines : 

(1)  The  belief  that  all  men  are  honest,  which  isn't  so. 
Any  concern  which  extends  accommodation  upon  the  as- 
sumption that  credit  may  be  granted  to  all  who  ask,  upon 
the  broad  proposition  that  the  human  race  is  imbued  with 
inherent  honesty  and  all  men  regard  their  word  as  good  as 
their  bond,  and  their  debts  sacred  obligations  to  be  met  if 
humanly  possible,  will  soon  find  its  shelves  empty,  its  bank 
account  exhausted,  and  its  books  full.  This,  no  doubt,  is 
the  reason  for  the  many  bankruptcies  in  the  retail  trades. 
The  failures  in  general  stores  and  dealers  handling  groceries, 
meats,  fish,  etc.,  amounted  in  number  to  over  4,300  in  1913 
with  liabilities  of  over  $28,000,000.  Credit  in  such  estab- 
lishments can  be  extended  on  no  other  basis  than  faith;  for 
even  a  near-scientific  method  is  quite  impossible. 

Large  mercantile  houses  and  department  stores,  how- 
ever, operate  credit  departments  which  make  an  investiga- 
tion into  the  risk  before  opening  a  credit  with  a  customer; 
but  even  this  can  go  but  little  way  to  protect  the  creditor  if 
the  buyer  is  dishonest.  And  even  with  the  utmost  care  and 
good  judgment  errors  will  be  made  and  losses  sustained. 
But  in  the  smaller  establishments  credit  is  based  upon  per- 
sonal knowledge,  often  more  or  less  casual,  and  the  hope 
that  the  buyer  is  honest. 

Frequently  payment  is  made  promptly  for  a  time  in  or- 


384 


THE    PRACTICAL   WORK   OF   A   BANK 


der  to  establish  credit  relations,  and  gradually  the  account 
is  built  up  until  it  assumes  dangerous  proportions  and  loss 
results.  The  retail  grocers  are  subject  to  this  experience 
most  of  all.  Weekly  or  monthly  bills  are  contracted  and 
promptly  met  for  a  time.  Then  part  of  the  amount  due  is 
paid,  buying  still  continuing,  small  payments  being  made, 

Guaranty  Trust  Company  of  New  York 

COMPARISON  OF  STATEMENTS 


ASSETS 

Cain  on  Hand  and  on  Deposit 

Nous  Receivable 
Account!  Receivable 
Merchandise 

Machinery  and  Fixture* 
Real  Estate  and  Building! 

Prepaid  Expensea 
MUcellaneoui 

TOT.l. 

LIABILITIES 

Notes  Payable 
Accounts  Payable 
Moneys  on  Deposit  with  us 
Accnied  Liabilities 
Dividends 
Miaollaneooa 

Mortgages  on  Real  Estate 
Bonds 

Total  Liabilitiea 
Net  Worth 
Capital 

Surplus 
Reserves 

TOTAL 

TOTAL  QUICK  ASSETS 
,       LIABILITIES 

EXCESS—  QUICK 

Annual  Sales 
Contingent  Liability 

COMPARISON    OF    STATEMENTS 


until  the  debt  grows  larger  instead  of  smaller,  and  often  the 
debtor  moves  to  parts  unknown,  leaving  the  dealer's  profit, 
and  sometimes  his  capital,  on  his  books  as  a  worthless 
account  receivable. 

There  is  now  a  movement  to  register  all  customers  of 
grocers,  so  that  a  blacklist  may  be  kept  of  all  bad  risks,  and 
reported  to  the  trade  in  general  as  a  protection  against 


ESSENTIALS    IN    GRANTING    CREDIT  385 

abuses.  Credit  that  is  extended  upon  such  grounds  is  not 
only  unsound,  but  highly  dangerous — quicksand  to  engulf 
the  unwary. 

Bank  credit  is  often  granted  on  the  same  principle.  The 
bank  man  knows,  or  thinks  he  knows,  his  borrower.  He 
deems  him  honest.  He  takes  his  note,  renews  it  from  time 
to  time,  worries  over  it,  endeavors  to  get  it  reduced,  or  get 
an  indorser;  but  after  renewing  until  hope  is  lost,  charges 
it  off.  But  all  credit  granted  upon  such  belief  is  costly, 
whether  in  banking  or  mercantile  life,  and  is  rapidly  giving 
way,  particularly  in  banking  and  large  enterprises,  to  more 
scientific  methods. 

Two  MEN  BETTER  THAN  ONE 

(2)  The  belief  that  if  one  does  not  pay,  another  will; 
therefore  to  the  credit  of  the  borrower  is  added  that  of  an- 
other person,  either  upon  indorsement  or  guaranty.     This 
is  more  often  used  in  banking  than  in  other  lines,  it  being 
frequently  required  that  there  shall  be  more  than  one  party 
to  the  credit — "two-name  paper."     In  European  practice 
this  is  quite  the  general  rule,  credit  instruments  carrying  at 
least  two  names  being  necessary  to  obtain  the  rediscount 
privileges  of  the  central  banks.    But  in  smaller  transactions 
it  would  be  impossible  to  obtain  this  safeguard,  the  small 
debtor  finding  it  difficult  to  obtain  a  guarantor  of  his  debt, 
although  in  the  cooperative  credit  systems  of  Europe  this 
form  of  credit  is  most  common;  but  this  is  due  to  the  close 
association  of  years,  family  descent  and  personal  contact 
that  warrants  risks  of  this  kind. 

PAST  PERFORMANCES 

(3)  The  belief  that  having  paid  in  the  past,  the  bor- 
rower will  continue  to  pay  in  the  future.    The  credit  of  the 
borrower  may  be  ascertained  from  his  "past  performances." 
This  may  take  on  the  character  of  close  investigation  into 
previous  business  dealings,  or  it  may  be  based  upon  per- 
sonal knowledge  of  the  debtor's  record.     Thus,  a  country 
grocery  may  change  hands.    The  previous  owner  may  place 
in  the  hands  of  the  new  proprietor  a  list  of  all  customers 
known  to  be  good  pay.    They  have  paid  him  regularly ;  they 


386  THE  PRACTICAL  WORK  OF  A  BANK 

doubtless  will  continue  to  pay  regularly.  They  may  be 
trusted.  Other  customers  may  be  trusted  to  limited 
amounts;  some  not  at  all. 

In  the  retail  trades  the  inquiry  often  takes  the  form  of 
an  investigation  into  the  applicant's  promptness  in  paying 
among  dealers  with  whom  he  has  carried  an  account.  It 
may  be  an  inquiry  of  the  butcher,  the  tailor,  the  grocer;  or 
it  may  be  ascertained  from  a  classified  list  compiled  by  com- 
mercial agencies  giving  the  experiences  of  such  dealers;  or 
it  may  be  a  special  report,  carefully  gathered. 

In  banking  the  inquiry  assumes  the  form  of  an  investi- 
gation by  a  bank  buying  commercial  paper,  to  ascertain  if 
all  such  debts  have  been  promptly  met  in  the  past,  by  corre- 
spondence among  banks  that  have  held  such  paper,  and 
their  opinion  of  the  paper;  or  it  may  be  an  investigation  by 
a  bank  or  mercantile  house  as  to  the  promptness  with  which 
the  debtor  has  met  his  bills.  If  he  has  taken  his  trade  dis- 
counts it  is  a  sure  indication  of  good  management.  His 
reputation  with  the  trade  is  important. 

! 
I 

PROPERTY  AND  PROPERTY  RIGHTS 

(4)  Belief  that  the  borrower  has  property  or  property 
rights  sufficient  to  warrant  the  risk  and  assure  payment. 
Credit  is  extended  largely  upon  the  debtor's  financial  condi- 
tion. This,  too,  may  be  elementary,  and  consist  merely  of 
the  knowledge  that  the  debtor  owns  a  house  and  lot,  or  a 
business,  or  other  property,  which  warrants  the  conclusion 
that  he  will  pay  because  he  has  the  means.  Or,  it  may  be 
the  result  of  more  careful  methods,  such  as  an  inquiry  into 
his  financial  affairs  which  finds  expression  in  a  statement  of 
condition  which,  if  honest  and  conservative,  will  reveal  his 
financial  standing. 

COLLATERAL  LOANS  NOT  ESSENTIALLY   CREDIT  TRANSAC- 
TIONS 

A  loan  based  upon  collateral  is  not  in  the  true  sense  a 
credit;  for  in  the  last  analysis  the  advance  is  not  made  on 
the  credit  of  the  borrower,  but  upon  the  value  of  the  property 
pledged  as  security.  The  mental  process  which  obtains  in 
such  a  transaction  is  not  such  as  precedes  the  granting  of 


ESSENTIALS    IN    GRANTING    CREDIT  387 

an  open  credit;  for  the  creditor  says  to  himself:  "I  have 
property  worth  so  much,  under  my  control,  belonging  to  my 
debtor.  I  think  he  will  pay;  I  hope  he  will — but  if  he 
doesn't,  I  have  enough  of  his  property  pledged  to  me  to 
reimburse  me,  even  though  it  declines  in  value."  This  is 
particularly  true  in  mortgage  and  collateral  loans. 

Upon  these  simple  thought  processes  all  credit  operations 
rest.  And  the  quality  of  the  credit  depends  upon  the  degree 
in  which  these  principles  exist  in  a  given  transaction.  But 
they  are  capable  of  infinite  expansion  and  of  manifold  com- 
binations so  that  no  two  credit  risks  are  exactly  alike, 
and  general  rules  must  be  applied  in  the  light  of  the  business 
under  test. 

It  is  as  difficult  to  apply  abstract  rules  in  credit  as  to  ap- 
ply abstract  rules  in  mathematics.  But  if  the  rule  is  ex- 
plained by  applying  it  to  a  problem,  clearness  follows,  and 
the  student  grasps  the  theory  by  having  it  applied.  It  is 
so  in  law,  or  any  other  department  of  learning.  It  is  so 
in  credit. 

PEESONAL  CREDIT 

By  the  term  personal  credit  is  meant  credit  based  upon 
persons  as  distinguished  from  credit  based  upon  property. 
Many  who  apply  for  credit,  and  are  perfectly  good  risks, 
have  nothing  but  themselves  to  offer  as  security,  their  prop- 
erty being  of  little  or  no  consequence  as  collateral.  To  the 
essential  element  of  honesty,  there  must,  however,  be  added 
the  security  of  an  assured  earning  power. 

It  is  an  obvious  truth  that  if  a  man  would  pay,  he  must 
have  the  funds  in  hand  or  in  expectancy.  His  honesty  may 
be  above  criticism,  his  record  unblemished,  and  yet  if  he  hat 
no  income,  his  credit  cannot  be  safe.  And  his  credit  is  safe 
only  in  proportion  to  his  income.  This  is  the  reason  so  many 
professional  men  are  poor  credit  risks.  Their  income,  while 
in  a  measure  sure,  is  small,  and  frequently,  as  in  the  case  of 
some  ministers  and  lawyers,  spasmodic. 

All  those  who  appear  before  the  public  must  maintain 
an  appearance  of  neatness,  if  not  prosperity.  It  is  their 
misfortune  and  not  their  fault.  They  often  use  their  credit 
to  bolster  up  appearances  and  the  creditor  suffers.  A  man 
earning  fifty  dollars  a  month  is  most  assuredly  not  a  good 


388 


THE   PRACTICAL   WORK  OF   A   BANK 


BILLS  RECEIVABLE  (HIT) 
ACCOUNTS  RECEIVABLE  (NCT) 


OOMMMOTtWi 

ec  or  PROCURING  CREDIT  FROM  TW  TO  TIME  wrm  YOU  FOR  OUR  NEGOTIABLE  w«  on  oTMEJtwm,  wi  FURNISH  THE  FOLLOWING 

•VOnABLE  CHANGE  IH  OUR  FINANCIAL  OOXWTKW,  AND  IN  TMi  ABSENCE  Of  SUCH  NOTICE  OR  Of  A  NIW  ADD  FULL  WRITTEN  STATE- 
A  CONTINUING  STATEMENT  AND  SUBSTANTIALLY  CORRECT  1  AND  IT  IS  HERESY  EXPRESSLY  AGREED  THAT  UPON  APPLICATION  FOR 
iHALL  HAVE  THE  SAME  FORCE  AND  EFFECT  AS  If  DELIVERED  AS  AN  ORIGINAL  STATEMENT  OF  OUR  FINANCIAL  CONDITION  AT  THE  TIME 


NOTES  PAYABLE 
ACCOUNTS  PAYABLE 
DEPOSITS 
BONDED  OEST 
MORTGAGES 
ACCRUED  LUWUTIM 

CAPITAL 

SURPLUS-PROFIT* 

RESERVES 


CONTINGENT  LIABILITIES.    ON  BILLS  I 


ILLS  RECEIVABLE. 


•FUL,  NOT   FROM   CUSTOMERS  OR  I 


MERCHANDISE.    FINIS 

O.     DESCRIBE    BRIEFLY- 
BUILDINGS.    COST  | 


ECTORS,  SUV-COMPANIES  OR  SIMILAR  SOURCES  I. 
HOT  REALIZABLE  WITHIN  IMMEDIATE  FUTURE  — 

AT  COST  0*  MARKET  I IS  ALL  SA1 

—ASSESSED   VALUE MARK 


MACHINERY  AND  FIXTURES. 


OTHER  ASSETS. 


INSURANCE.     STATE  KIND  AND  I 

1OTES  PAYABLE.    To  OWN  BAI 


.VAILABLE  FOR   PAYING   DEBTS  l_ 


ACCOUNTS  PAYABLE. 


-CO  YOU  DISCOUNT  AND  ANTICIPATE  t. 


DEPOSITS.    TO 


3ONOED   DEBT  AND  MORTGAGES. 


'CCnuEO  LIABILITIES.    ITEMU 


RESERVES,    rr 


ED  PUBLIC  ACCOUNTANT! *  SO,  OIVI  NAME  Of  FIRM  ADD  DATE  OP  ( 

CORPORATE  "'"» 


•  <JT*TI  omcu-t  tm*) 


IATURE  OP  Hnwci 


LOCATION  OF  PLANTS  AND  BRANCH  OFFICES. 

OFFICERS 


DIRECTORS 


.TREASURE* 
-SECRETARY 


STANDARD     FOBJI     OF     CREDIT     STATEMENT    FOR     CORPORATIONS ADOPTED     BY     AMERICAN 

BANKERS  ASSOCIATION  AND  NEW   YORK  STATE   BANKERS  ASSOCIATION 

risk  for  a  hundred-dollar  debt  due  in  thirty  days.  He  might 
be  a  good  risk  for  a  hundred  dollars'  worth  of  furniture  on 
three  dollars  or  less  a  week ;  but  his  earning  power  absolute- 
ly negatives  the  idea  of  being  able  to  meet  a  large  bill  in  a 
short  period  and  no  sane  man  would  take  the  risk.  Install- 
ment houses  gauge  the  amount  of  goods  they  will  sell  a  man 
largely  by  his  income. 


ESSENTIALS    IN    GRANTING    CREDIT  S89 

PERSONAL  CREDIT  DISTINGUISHED 

Individual  credit  consists  of  two  varieties,  secured  and 
unsecured.  Under  the  first  head  come  all  sorts  of  goods 
sold  on  the  partial  payment  plan,  such  as  pianos,  sewing 
machines,  household  goods  of  every  description,  phono- 
graphs, books,  jewelry  and  clothing.  Sales  to  merchants  are 
delivery  trucks,  scales,  typewriters,  cash  registers,  etc.  The 
security  lies  in  the  vendor's  lien,  as  evidenced  by  a  condi- 
tional bill  of  sale  or  chattel  mortgage.  In  the  former  case, 
title  to  the  property  does  not  vest  in  the  buyer  until  the  last 
payment  is  made  and  recovery  of  the  goods  is  a  simple  mat- 
ter; but  in  the  chattel  mortgage,  title  passes  upon  consum- 
mation of  the  sale  and  the  mortgage  lien  follows.  To  col- 
lect by  lawful  recourse  means  foreclosure — a  slow  and  costly 
process.  The  security  is  in  the  goods  more  than  in  the  per- 
son, as  important  as  the  latter  element  may  be. 

Enormous  quantities  of  goods  are  sold  on  this  plan, 
many  flourishing  businesses  being  built  up  by  the  long  term 
of  credit  extended  and  the  easy  terms  allowed.4  The  risk 
lies  in  the  fact  that  the  goods  may  be  used  or  misused  for  a 
time  and  returned,  or  carried  away  secretly  so  that  follow- 
ing them  is  expensive;  but  the  increased  sales  and  large 
profits  offset  such  losses.  Moreover,  the  prices  are  much 
higher  than  for  cash,  it  being  not  uncommon  for  installment 
houses  selling  furniture  to  mark  the  goods  at  from  two  to 
three  hundred  per  cent,  profit;  and  for  very  good  reasons. 
Good  houses,  however,  endeavor  to  obtain  as  large  an  initial 
deposit  as  possible,  so  that  the  buyer's  equity  will  be  large 
and  default,  therefore,  expensive  to  him.  Completion  of  the 
contract  is  desirable  to  both  seller  and  buyer. 

Secondly,  the  unsecured  credit,  which  is  based  solely 
upon  the  borrower's  promise  and  the  seller's  expectancy  that 
he  will  pay.  To  illustrate :  Many  school  teachers,  policemen, 
firemen,  municipal  employees,  clerks,  clergymen,  and  others, 
maintain  charge  accounts  at  the  retail  stores.  The  reason 
for  this  will  be  noted  below.  They  have  no  real  property, 
as  a  rule,  and  frequently  but  little  personal.  And  yet  they 
are  generally  regarded  as  good  credit  risks,  on  the  strength 
of  their  "job."  The  only  security,  aside  from  their  honesty 

*One  installment  house  in  New  York  does  a  yearly  business  of  over  $2,000,000 
in  one  branch,  and  has  20,000  open  accounts. 

36 


890 


THE    PRACTICAL   WORK   OF    A   BANK 


to*  TMI  PURPOSE  or  rwocuRrtw  CREDIT  neat  TIM- 

M  *  T»U«  ANO  AeCURATZ  STATEMENT  Of  OUR  FINANCIAL    CONDITION    ON. 

MENT.  THIS  MAY  IE  CONSIDERED  At  A  CONTINUING  STATEMENT  AND  Sue 
FURTHER  CREDIT,  THtt  STATEMENT  SMALL  HAVE  THE  SAME  FORCE  «ND  II: 
SUCH  FURTHER  CltEDTT  »  REQUESTED. 


1  VOU  FOR  OUR  NEGOTIABLE  I 


>  OTHERWISE,  WE  FURNISH 


CONDITION,  AHD   I 


ME  ABSENCE  OP  SUCH   I 


FIRM 

HE  FOLLOWING 
YOU  IMMEDIATELY 
L  WRITTEN  iTATE- 
I  APPLICATION  FOM 


r  AJ  IF  DELtVEREO  A*  A 


ASSETS 

LIABILITIES 

CASH 
BILL*  RECEIVABLE  (HIT) 
ACCOUNT*  RICHVAIU  (MT) 

MERCHANOK 
UNO 

BUILOINO* 

MACHINERY-FIXTURE* 

NOTES  PAYABLE 
ACCOUNT!  PAYABLE 
DEPOSITS 
MORTGAGE* 

ACCRUED  LlAaiUTIE* 





_^_ 

- 

— 





— 

— 

TOTAL 

NET  WORTH 
RESERVES 
TOTAL 

— 



- 

- 

CONTINGENT  LIABILITIES. 


ABLE    DOCOUNTEO 


CASH.     ON  HAND  AND  V 
BILLS  RECEIVABLE. 


EMBERS  OF  FIRM  OR  SIMILAR  SOURCES  I. 


MERCHANDISE.    FINISHE 

LAND.     DESCRIBE    B 
BUILDINGS.    COST 


MACHINERY  AND  FIXTURES. 


OTHER  ASSETS. 


INSURANCE.    STATE  I 


'  ASSETS  UNAVAILABLE  FOR    I 


-DEMUICIATION- 


NOTES  PAYABLE. 


MROUOM    BROKER; 


ACCOUNTS  PAYABLE.    TERMS  OF  F 


DEPOSITS.    TIME  c 
MORTGAGES.   DUE 


-ON  WHAT  ASSETS  / 


ACCRUED  LIABILITIES.    ITEMU 
NET  WORTH 


GENERAL   PARTNERS 


SPECIAL  PARTNERS 


18  THE  FIRM,  OR  ANY  MEMBER  THEREOF,  C 
RESERVES.     TOIM 

NET  BALES 

LAST  FISCAL  .YEAR         .  .          . 

COST  OF  SALES     . 


MTEDEST,  TAXES,  DEPRECIATION,  I 
WITHDRAWALS  BY  PARTNERS 
GAIN  FOR  YEAR     .  .  . 


HAVE  THE  BOOKS  BEEN  AUDITED  I 
ADORE**  AND  OATS— 


_IF  80,  GIVE  NAME  OF  FIRM  AND  DATE  OP  AUDIT- 


STANDARD    FORM    OF     CREDIT    STATEMENT    FOR    FIRMS ADOPTED    BY    AMERICAN     BANKERS 

ASSOCIATION     AND     NEW    YORK     STATE     BANKERS     ASSOCIATION 


and  good  character,  and  the  garnishee  process  where  such 
is  possible,  lies  in  the  fact  that  the  applicant  has  steady  em- 
ployment. But  many  who  are  on  the  charge  ledgers  of  the 
great  stores  do  not  even  bring  the  qualification  of  an  assured 
income,  being  salesmen,  clerks,  and  others  whose  earnings 
are  largely  dependent  upon  commissions  and  the  state  of 
trade. 


ESSENTIALS    IN    GRANTING    CREDIT  891 

THE  GRANTING  OF  PERSONAL  CREDIT 

In  the  granting  of  personal  credit  two  things  are  neces- 
sary to  determine :  '  First,  that  the  applicant  is  honest  and 
well  regarded  by  those  in  position  to  know;  and,  secondly, 
that  he  has  the  funds,  in  anticipation,  at  least,  to  meet  the 
debt  as  it  falls  due.  He  has  "discounted  the  future" — will 
the  future  bear  discounting?  These  are  the  questions  to 
determine. 

The  starting  point  lies  in  the  application.  This  prefer- 
ably is  an  envelope  of  good  quality,  so  that  the  information 
may  be  filed  therein,  with  the  original  data  written  on  the 
outside.  Too  much  cannot  be  known  about  the  applicant. 
The  problem  is  to  get  it  diplomatically,  and  correctly,  and 
without  offense  to  the  delicacy  that  attends  the  asking  for 
credit,  particularly  personal  credit. 

The  application  includes:  First,  the  full  name  of  both 
husband  and  wife.  Most  of  the  credits  in  retailing  are 
opened  by  the  wife  who  does  the  shopping,  and  generally  in 
her  own  name.  (It  is  estimated  that  fully  eighty  per  cent, 
of  personal  credit  is  with  women.)  But  the  husband  being 
the  bread-winner  is  the  important  element  to  consider. 
Next,  the  residence  and  how  long  there.  Long  tenancy  is 
a  good  omen.  "Movers"  are  not,  as  a  rule,  desirable,  either 
as  tenants  or  as  credit  risks.  Husband's  occupation  and 
how  long  employed  in  present  and  past  positions.  Refer- 
ences come  next.  These  are  usually  two  in  number,  and  are 
preferably  those  who  have  dealt  in  a  business  way  with  the 
applicant,  and  especially  on  credit. 

REFERENCES 

Bank  references  are  most  satisfactory,  and  are  attended 
with  no  embarrassment  to  the  applicant.  But  it  is  surpris- 
ing how  many  who  have  bank  accounts  buy  furniture  on 
the  installment  plan,  as  an  easy  way  of  saving  (?)  money; 
or,  to  speak  correctly,  an  easy  way  of  paying  for  such  arti- 
cles, frequently  unnecessary.  Savings  banks,  as  a  rule,  do 
not  give  references  without  explicit  order  from  the  depos- 
itor, and  such  references  are  not  usually  satisfactory,  while 
banks  of  discount  are,  as  a  rule,  glad  to  extend  the  courtesy, 
but  without  obligation  on  their  part. 


892  THE    PRACTICAL  WORK  OF   A   BANK 

It  is  interesting  to  note  that  many  who  have  gone 
through  life  on  the  pay-as-you-go-or-don't-go  basis,  find  it 
embarrassing,  to  say  the  least,  to  give  references  when  ap- 
plying for  credit. 

Only  personal  friends  can  be  used  as  references  in  such 
cases,  and  many  a  proud  spirit  rebels  at  letting  even  their 
closest  associates  into  their  personal  secrets.  Diplomacy  is  a 
fine  art  here,  and  many  a  sale  has  been  lost  because  a  deli- 
cate situation  was  badly  handled. 

PERSONAL  CREDIT  RATINGS 

Having  the  application  as  a  starting  point,  the  investi- 
gation follows.  The  first  step  is  to  look  up  the  applicant 
in  the  credit  rating  books.  These  are  compilations  made 
from  careful  investigations  by  credit  reporting  companies, 
giving  the  experiences  of  those  who  have  sold  the  parties 
named  therein.  By  a  system  of  letters  or  figures  these  ex- 
periences are  summarized,  as,  for  instance:  "John  Smith, 
402  West  Seventy-second  street,  PPP,"  means  that  three 
dealers  have  sold  to  John  Smith  and  found  him  satisfactory 
and  prompt  in  his  payments.  If  more  detail  is  wanted  a 
special  report  can  be  obtained  for  a  small  fee,  and  this  goes 
quite  extensively  into  the  applicant's  record. 

The  attempt  to  classify  and  rate  personal  credit  risks  is 
to  be  encouraged.  At  best  it  is  not  absolutely  accurate ;  but 
working  upon  the  theory  that  having  paid  one  merchant 
the  buyer  will  pay  another,  some  degree  of  safety  may  be 
obtained.  Blacklists  have  been  made  out,  and  experiences 
exchanged,  which  when  made  with  care  are  a  safeguard  not 
to  be  despised  in  the  granting  of  personal  credit. 

Next,  the  references  are  written  to,  the  letter  being 
couched  in  such  terms  as  to  hide  the  real  reason  for  the  re- 
quest except  that  it  is  an  inquiry  into  the  person's  habits  and 
general  financial  situation.  Next  comes  the  "neighborhood" 
inquiry.  This  usually  consists  of  a  personal  investigation, 
looking  into  the  person's  desirability  as  a  tenant,  a  neighbor, 
a  boarder,  etc.  Nearby  stores  are  frequently  visited  to  as- 
certain if  the  party  trades  with  them  and  if  so  upon  what 
basis  and  with  what  results.  All  this  is  done  as  by  an  ama- 
teur detective,  so  that  embarrassment  does  not  follow.  Last- 
ly, but  in  many  cases,  first,  comes  the  verification  of  the 


ESSENTIALS    IN    GRANTING    CREDIT  398 

business  connection.  This  is  often  done  so  cleverly  that  the 
applicant  himself  is  interviewed  without  knowing  the  ob- 
ject of  the  visit,  and  many  credits  are  opened  on  this  test 
alone. 

Many  applicants  for  credit  do  not  want  their  superiors 
to  know  of  their  condition,  while  others  do  not  care.  Length 
of  service  counts  for  much  and  some  credit  men  will  pass 
an  application  upon  the  strength  of  long  employment  in 
one  place,  and  well  they  might.  Where  the  applicant  is  a 
public  officer,  whose  habits  are  well  known,  and  whose  com- 
pensation is  a  matter  of  record,  no  other  investigation  need 
follow.  For  instance,  in  New  York  a  list  is  published  of 
all  municipal  employees  and  school  teachers,  so  that  such  in- 
formation is  easy  to  obtain.  This,  too,  is  often  deemed 
sufficient  to  open  a  credit. 

INDIVIDUAL  CREDIT  vs.  MERCANTILE  CREDIT 

Individual  credit  is  to  be  distinguished  from  mercantile 
credit.  While  individual  credit  is  credit  extended  by  a  busi- 
ness concern  to  an  individual  as  such,  mercantile  credit  is 
the  credit  extended  by  one  business  house  to  another  as  such. 
The  credit  which  John  Smith  the  individual  seeks  for  his 
household  purposes  differs  from  that  which  he  seeks  as  a 
trader.  The  one  is  consumptive  credit;  the  other  trading 
credit. 

The  same  process  which  obtains  in  the  granting  of  per- 
sonal credit  takes  place  in  extending  mercantile  credit,  in  its 
essentials,  but  has  surer  grounds  upon  which  to  work,  and 
usually  has  property  as  a  basic  element.  Honesty,  business 
sagacity  and  a  good  record  among  the  trade  are  as  essen- 
tial in  mercantile  credit  as  the  qualifications  mentioned 
above  are  essential  in  personal  credit. 

In  the  place  of  the  references  above  indicated,  we  have 
the  trade  references.  In  the  place  of  the  neighborhood  in- 
quiry, we  have  the  banking  and  mercantile  inquiry,  seeking 
to  discover  how  the  borrower  has  conducted  his  affairs  in  the 
past.  And  lastly,  in  the  place  of  earning  power  as  an  in- 
dividual we  have  earning  power  as  a  trader,  and  this  is  evi- 
denced by  his  statement  which  reveals  his  present  condi- 
tion, and  in  comparison  with  previous  statements  and  profit 
and  loss  accounts  indicates  the  profitableness  of  the  business 


394  THE    PRACTICAL   WORK   OF   A   BANK 

Individual  credit  has  well  been  called  consumptive  credit ; 
for  the  credit  is  used,  as  a  rule,  in  order  to  satisfy  present 
needs  from  future  income.  Retail  credit  is  quite  general 


QUESTIONAIRE 


ASSETS 


CASH— MOW  MANY  BANK  ACCOUNTS  t '. 

BILLS  RECEIVABLE  (NET) 

ANY   EXCEPT   FOR    MERCHANDISE  SALES  T ANY   DISCOUNTED  1- 

ACCOUNTS  RECEIVABLE  (NET) 


WHAT  18  ITS  CONDITION? ANY  OLD  OR  UNSALABLE t- 

REAL  ESTATE  AND  BUILDINGS 

CONDITION  OF  STORE  OR  PLANT 

OTHER  ASSETS 


13  THERE  ANY  LIEN  ON  SO-CALLED  QUICK  ASSETS  T _ 

LIABILITIES 

NOTES  PAYABLE 

DO  YOU  USE  BROKERS  AND  AT  SAME  TIME  BORROW  FROM  YOUR  BANKS  f 

ACCOUNTS  PAYABLE 

DO  YOU   DISCOUNT  ALL  YOUR    BILLS  r DO  YOU  ANTICIPATE  t- 

DEPOSITS 

ARE  THEY  ON  TIME  OR  DEMAND  r FROM  WHOM! 

BONDED  DEBT  AND  MORTGAGES 

HOW  SECURED! ANY  CHATTEL  MORTGAGES  OUTSTANDING  »_ 

OTHER  LIABILITIES-CONTINGENT  OR  OTHERWISE! 


MISCELLANEOUS 

CAPITAL 

PREFERRED COMMON 

NET  WORTH 

ANY  OUTSIDE  INTERESTS  OF  FIRM  OR  MEMBERS  I- 
RESERVES 

DESCRIBE , 

INSURANCE 


DESCRIBE. 


SALES    (NET)    TO    PUBLIC. 


GAIN   FOR  YEAR  AFTER   PAYING  ALL  EXPENSES,  INCLUDING   DIVIDENDS  OR  WITHDRAWALS- 
BOOKS  EXAMINED  BY  CERTIFIED  PUBLIC  ACCOUNTANT  f 

NATURE  OF  BUSINESS 


THIS    dUESTIONAIRE    IS    TO    BE    USED    BY    BANK    OFFICERS    OR    HEADS    OF    CREDIT    DEPART- 
MENTS   IN    DISCUSSING   STATEMENTS    HANDED    IN    BY    THE    MAKERS IN    EXAMINING 

STATEMENTS  BANK  OFFICERS  CAN  CHECK  OFF  THOSE  POINTS  WHICH  THEY  WISH 
INVESTIGATED  FURTHER  BY  THE  CREDIT  DEPARTMENT — THIS  SHOULD  BE  USED  WITH  A 
CARBOV,  THUS  GIVING  A  DUPLICATE  RECORD 


ESSENTIALS    IN    GRANTING    CREDIT  895 

for  the  necessities  of  life  and  sometimes  the  luxuries.  It  is 
not  based  upon  an  exchange  of  goods.  It  does  not  bridge 
the  time  from  one  process  to  another,  but  is  extended  that 
present  wants  may  be  purchased  upon  expectancy.  It  is  an 
annuity  working  backwards. 

Commercial  or  mercantile  credit,  however,  has  produc- 
tion in  mind.  It  "carries"  a  business  transaction.  It  fills 
the  void  between  purchase  and  sale.  It  gives  the  buyer  time 
to  turn  the  goods  into  money  before  he  pays  for  them.  It 
gives  the  manufacturer  time  to  turn  raw  material  into  fin- 
ished products  before  payment  is  due.  It  provides  working 
capital.  It  is  productive  credit,  and  the  whole  process  of 
production,  transportation  and  distribution  is  based  upon  it. 

THE  CHARGE  ACCOUNT 

To  distinguish  again  by  example,  let  us  take  a  typical 
illustration  of  an  application  for  personal  credit.  A  school 
teacher,  for  instance,  applies  to  a  department  store  for  a 
monthly  charge  account.  The  reasons  may  be  few  or  many. 
She  may  be  short  of  funds  and  trading  upon  her  expected 
salary.  She  may  prefer  to  shop  on  a  charge  account  be- 
cause it  eliminates  the  carrying  of  money  and  simplifies  the 
return  of  goods.  She  may  like  the  prestige  a  charge  ac- 
count gives  her.  She  may  have  been  solicited  to  open  such 
an  account.  She  buys,  not  to  sell  again,  but  to  consume. 
Not  a  single  purchase  is  for  reselling,  but  for  the  satisfac- 
tion of  her  wants.  Proving  satisfactory  upon  investigation 
as  to  her  position  and  personal  habits,  she  gets  the  credit. 

But  John  Smith,  the  merchant,  buys  to  sell  again.  He 
has  property.  He  has  a  record;  he  has  a  reputation.  His 
affairs  are  easily  checked.  He  makes  a  statement  of  condi- 
tion, which  if  wilfully  wrong  is  a  felony.  We  find  that  for 
every  dollar  he  owes  he  has  one,  two,  or  two  and  a  half  in 
hand  or  due  him.  We  can  have  an  audit. 

We  can  with  a  fair  degree  of  accuracy  judge  our  risk,  and 
know  that  by  the  extension  of  the  credit  he  will  make  a 
profit  and  we  will  make  a  customer.  We  base  one  credit 
solely  upon  the  person ;  the  other,  in"  a  very  large  measure, 
upon  the  property.  In  the  former  we  expect  to  find  but 
one  (perhaps  two)  of  the  "big  C's  of  credit" — (Character, 
Capacity  and  Capital) — namely,  character.  In  the  latter, 


896  THE    PRACTICAL  WORK  OF   A  BANK 

we  must  have  all  in  some  degree,  and  preferably  all  in  a 
large  degree.  But  the  capital  element  is  generally  entirely 
lacking  in  personal  credit,  while  an  essential  element  in 
trading  credit.  Lack  of  capital  is  responsible  for  more  fail- 
ures than  any  single  cause. 

THE  GROWTH  OF  PERSONAL  CREDIT 

The  growth  of  individual  credit  may  be  ascribed  to  three 
causes:  (a)  The  desire  to  extend  business.  Many  concerns 
catering  to  the  retail  trade  encourage  charge  accounts  and 
carry  thousands  of  them  on  their  books,  knowing  full  well 
that  credit  accommodations  lead  to  over-buying.  Well- 
rated  people  are  constantly  solicited  to  open  such  accounts; 
and  not  knowing  how  their  names  are  secured,  take  it  as  a 
compliment  and  are  flattered  thereby,  (b)  The  fear  of  of- 
fending customers  by  refusing  credit.  This  is  particularly 
true  in  very  small  establishments,  where  to  refuse  the  request 
to  "charge  it"  would  lead  to  loss  of  custom.  Moreover, 
it  is  harder  to  refuse  a  small  credit  than  a  bank  loan.  One 
is  strictly  personal  in  its  setting,  while  the  other  may  be  re- 
ferred to  that  impersonal  "discount  committee"  which  exists 
often  in  name  only,  but  is  a  good  bumper  between  the  offi- 
cial and  the  applicant,  (c)  The  all- too-prevalent  tendency 
to  live  beyond's  one's  means,  making  it  necessary  to  live  on 
expectancies  rather  than  realities. 

Personal  credit  is  often  used  to  bolster  up  a  tottering 
man.  It  is  used  to  create  impression.  Credit  men  could 
tell  tale  after  tale  of  charge  accounts  abused,  and  install- 
ment buying  resorted  to  by  those  who  would  ordinarily  dis- 
dain such  a  transaction,  for  no  other  reason  than  to  make  an 
appearance.  The  credit  that  wrecks  business  in  New  York 
is  not  Third  Avenue  credit,  but  Fifth  Avenue  and  River- 
side Drive  credit.  Third  Avenue  may  have  a  certain  kind 
of  credit  (usually  the  dollar-a-week  credit),  while  Riverside 
Drive  has  credit  (or  gets  it)  and  rarely  thinks  of  paying 
cash.  A  Fifth  Avenue  tailor  told  the  writer  recently  that 
his  accounts  run  from  two  to  four  years,  and  "a  little  cash 
now  and  then  looks  mighty  good  to  him." 

This  abuse  of  personal  credit  is  notorious  among  the 
rich,  the  idle  rich,  the  would-be  rich,  or  the  was-rich.  This 
condition  may  be  due  to  the  mental  conclusion  that  because 


ESSENTIALS    IN    GRANTING    CREDIT  897 

they  are  good  for  their  debts,  they  need  not  hurry  to  pay 
them;  or  it  may  be  due  to  ignorance  of  what  the  tardiness 
costs  them.  The  tailor  above  mentioned  admitted  that  he 
got  ample  interest  on  his  money  by  the  long  delay,  the  in- 
terest charge  being  concealed  in  the  price  of  the  garment. 
But  were  he  given  his  choice,  he  would  doubtless  choose 
shorter  credit  and  less  profit. 

The  credit  man  of  one  of  the  large  department  stores 
that  caters  to  Fifth  Avenue  trade  states  that  Fifth  Avenue 
pays  as  promptly  as  can  be  expected  if  proper  credit 
methods  are  used.  If  the  risks  are  selected  and  the  credit 
machinery  effective,  no  complaint  will  arise  as  to  the  desir- 
ability of  the  patronage  of  the  wealthy.  The  tailor  does 
not  select  his  risks. 

PERIOD  OF  PERSONAL  CREDIT 

The  period  for  which  individual  credit  is  extended 
should  coincide  with  the  debtor's  periods  of  income.  In  the 
case  of  the  wage-earner,  who  receives  his  pay  weekly,  weekly 
credit  would  be  justified,  but  prompt  settlement  should  be 
demanded  in  order  that  the  debt  might  not  overlap  into  an- 
other period.  Salaried  men  who  are  paid  monthly  may  safe- 
ly be  carried  for  a  month,  but  the  same  rule  applies.  Those 
whose  earnings  are  dependent  upon  fees,  which  may  be  more 
or  less  uncertain  or  spasmodic,  cannot  in  the  nature  of 


ffew  Btumeti-. , — .£.- 
Check  Dtik  !< 

NBW  ACCOUNT.        oa  *. />*/. .*£ 


xX-M*J^*AAA^..-^*>  ,, 

Q 


Ctrrttpmdrna  Depl S 

Remittance  Depl.  — .i*T- 


t&  First  Deposit         fo/a-So 


Date  opened.  - 

Introduced  by  ......      kA-«i«ft-T-«sn_o  ----------------  .....  .,  .....  . 

Reference,—      --»  .         fiwour-SCl-  *~-ko. 

~ 

Succeeds  a/c  of  -----  jjjrvs**.    _ 
Remarks: 


EECOBO   OF    HEW    ACCOUNTS,    FILED    IK    CREDIT   OFFICE 


398  THE   PRACTICAL  WORK   OF    A   BANK 

things  be  in  funds  regularly,  and  credit  in  such  cases  is  of 
longer  duration  than  in  the  case  where  income  is  steady 
even  though  small. 

The  time  element  is  a  factor  of  no  mean  import  in  in- 
dividual credits.  The  obligation  of  the  merchant  has  a  fixed 
maturity,  if  in  the  form  of  a  note,  and  generally  so,  if  in  the 
form  of  a  book  account,  especially  with  the  system  of  cash 
discounts  now  so  generally  prevailing.  He  expects  to  meet 
his  bill  or  his  note  at  maturity.  Not  so,  however,  in  per- 
sonal credit.  While  the  terms  may  be  thirty  or  sixty  days, 
this  means  nothing  to  the  charge  customer.  He  pays  when 
convenient.  Ask  the  average  charge  customer  what  are  the 
terms  of  his  credit,  and  when  he  pays  his  bills,  and  he  will 
answer,  if  honest,  "At  my  convenience";  and  sometimes 
"Never!" 

While  in  a  measure  personal  credit  is  perhaps  the  most 
risky,  yet  on  the  broad  assumption  that  the  average  man  is 
honest,  it  need  not  be  attended  with  undue  dangers.  It  re- 
quires diplomacy,  skill,  knowledge  of  human  nature,  tact, 
courtesy,  firmness.  To  get  business;  to  hold  it;  to  say  "no" 
and  do  it  kindly;  to  be  liberal,  yet  safe;  to  select  the  good 
and  discard  the  bad — all  this  falls  to  the  lot  of  the  personal 
credit  man. 

LOSSES  IN  PERSONAL  CREDIT 

The  losses  in  personal  credit  must  in  the  aggregate  be 
enormous.  The  losses  compiled  by  the  agencies  do  not  and 
cannot  include  those  unrecorded  losses  suffered  by  retail 
merchants  the  country  over.  Thousands  of  small  groceries, 
laundries  and  butchers  accept  these  little,  and  sometimes 
big,  losses  as  a  matter  of  fact — a  necessary  evil  in  their  busi- 
ness— and  make  the  best  of  it,  satisfied  to  make  a  living  in 
spite  of  them.  From  the  small  corner  grocery  to  the  huge 
department  store,  whose  losses  are  kept  down  by  better 
methods,  this  evil  appears,  as  an  open  sore,  to  be  kept  under 
some  control,  but  not  entirely  healed.  It  is  no  wonder  that 
the  merchant  thrives  who  sells  for  cash  only.  His  profits, 
though  small,  are  certain,  and  a  dollar  in  the  till  is  worth 
two  on  the  books. 

Lawyers  cannot  collect  for  their  legal  services;  doctors 
for  their  professional  calls;  the  latter  being  especially  sub- 


ESSENTIALS    IN    GRANTING    CREDIT  399 

ject  to  this  abuse,  not  to  speak  of  those  losses  taken  by  in- 
dividuals who  loan  their  friends  money,  in  the  hope  that 
payment  will  some  time  be  made,  and  find  they  have  mis- 
taken a  loan  for  a  gift. 

PERSONAL  CREDIT  THE  FOUNDATION  OF  THE  CREDIT  SYSTEM 

It  is  obvious  that  personal  credit  is  the  very  foundation 
of  the  whole  credit  structure.  If  the  retailer  extends  credit 
unwisely,  so  that  his  bills  cannot  be  promptly  met,  the  job- 
ber or  wholesaler  cannot  meet  his.  The  manufacturer  in 
turn  cannot  meet  his,  and  the  weakness  extends  to  the  whole 
system.  If,  on  the  other  hand,  the  retailer  extends  credit 
only  to  those  worthy  and  prompt  (as  all  well  regulated 
credit  departments  endeavor  to  do)  or  trades  for  cash,  the 
next  in  line  feels  the  stimulus,  and  so  on  through  the  whole 
course  of  trade. 

Business  cannot  long  be  conducted  on  mere  book  ac- 
count. While  the  account  receivable  is  a  simple  and  ordi- 
narily a  good  credit  instrument,  prompt  settlement  is  the 
very  essence  of  sound  business.  Payment  in  some  more 
desirable  form  of  credit  instrument  must  not  be  long  de- 
layed, for  with  the  assets  of  business  in  form  of  accounts 
receivable  the  burden  of  carrying  the  credit  becomes  too 
great  a  strain  upon  banking  capital,  and  bankruptcy  en- 
sues. Many  a  business  has  been  wrecked  upon  the  quick- 
sand of  personal  credit.5  Whom  to  trust  is  the  problem 
of  all  business.  To  get  the  money  for  goods  sold  is  the 
function  of  the  credit  department  as  well  as  to  decide  who 
shall  have  goods  on  credit  and  upon  what  terms.  And  to 
collect  money  is  as  fine  an  art  as  to  sell  goods. 

MERCANTILE  CREDIT 

In  its  economic  sense  mercantile  credit  is  the  power  to 
secure  goods  for  the  purpose  of  exchange  in  return  for  a 
valuable  consideration  promised  in  the  future.  It  is  a  sale 
of  goods  on  time.6 

&The  accounts  of  a  large  department  store  in  New  York  were  scaled  down 
twenty-live  per  cent,  upon  a  careful  audit — a  very  large  shrinkage,  due  in  the 
main  to  too  liberal  credit  methods. 

6Hagerty,  "Mercantile  Credit." 


400  THE    PRACTICAL  WORK  OF   A   BANK 

In  a  previous  paragraph  we  have  discussed  productive 
credit  and  consumptive  credit;  and  while  personal  credit  is 
largely  consumptive  credit,  mercantile  credit  is  quite  alto- 
gether trading  credit — carrying  credit. 

Commercial  credit  and  personal  credit  combined  are 
like  the  piers  of  the  Brooklyn  Bridge — they  carry  the  load. 
It  must  be  sound,  or  the  credit  system  collapses.  Weakness 
in  the  credit  methods  of  the  retailer  or  the  jobber  carries 
weakness  to  all  above  him.  Take  the  case  of  cotton. 
The  farmer  having  pledged  his  crop  to  feed  his  hands  and 
grow  his  crop,  has  expected  to  pay  the  merchant  when  he 
sells  his  cotton.  He  cannot  sell.  The  merchant,  not  receiv- 
ing his  money,  cannot  pay  his  jobber.  The  jobber  cannot 
pay  the  manufacturer,  and  he  cannot  pay  his  bank.  And  so, 
one  is  dependent  upon  the  other,  as  current  history  demon- 
strates, and  strength  for  one  is  strength  for  all;  and  weak- 
ness in  one  spells  weakness  for  all. 

BENEFITS  OF  COMMERCIAL  CREDIT 

The  benefits  of  commercial  credit  are  so  well  understood 
that  the  primary  benefit  only  needs  to  be  mentioned  to  sug- 
gest others,  that  is,  the  enhanced  profit  that  follows  the  use 
of  credit.  For  instance:  A  merchant  has  a  capital  of  $10,- 
000  and  borrows  $40,000.  Suppose  he  makes  a  gross  profit 
of  ten  per  cent,  on  the  capital  employed,  and  has,  therefore, 
$5,000  as  the  result  of  his  trading.  He  pays  five  per  cent, 
on  his  borrowed  capital,  which  reduces  the  profit  to  $3,000. 
But  if  he  had  not  borrowed,  and  used  only  his  own  capital  at 
the  same  rate,  he  would  have  netted  but  $1,000;  therefore, 
by  using  the  credit  that  rested  upon  his  original  capital  rein- 
forced by  his  ability  and  integrity,  he  has  made  $2,000  as  a 
reward  for  knowing  how  to  employ  banking  credit. 

BANK  CREDIT  RESTS  UPON  MERCANTILE  CREDIT 

The  credit  with  which  a  bank  deals  consists  in  issuing 
bank  notes,  redeeming  checks  and  certifications,  meeting  its 
acceptances  and  lending  money.  Its  credit  operations,  how- 
ever, would  be  largely  impossible  were  it  not  for  mercantile 
credit.  The  functions  of  note  issue  and  deposit  exist  be- 
cause of  business  dealings;  and  if  there  were  no  business 


ESSENTIALS    IN    GRANTING    CREDIT  401 

debts  settled  by  negotiable  paper  the  function  of  discount 
could  not  obtain.  It  is  the  function  of  the  bank  to  carry 
the  debts  that  business  creates ;  and  as  these  debts  are  sound, 
the  banking  operations  based  thereon  are  sound.  This  is 
the  reason  the  Federal  Reserve  Board  has  been  so  particu- 
lar that  the  bills  offered  for  discount  shall  arise  out  of  mer- 
cantile dealings — productive  and  consumptive  processes,  and 
not  speculative.  The  basic  principle  laid  down  in  their  defi- 
nition of  November  10,  1914,  was  that  the  debt  shall  be  self- 


$ 

Answered  Enquiry  from.. 


See  Letter  Booted?  A-  Folio 


MEMO    OF  INaUIRY    ANSWERED    REGARDING    CUSTOMER'S    STANDING 

liquidating,  of  short  duration,  to  cover  the  time  lapsing  be- 
tween one  process  and  another,  the  longer  time  paper  neces- 
sary for  agricultural  and  stock-raising  purposes  being  limit- 
ed to  twenty-five  per  cent,  of  the  capital  of  the  Reserve 
Bank  paid  in. 

The  power  to  create  credit  in  banking  rests  to  a  consid- 
erable extent  upon  mercantile  credit.  The  merchant  takes  a 
note  to  the  bank,  and  gets  it  discounted.  He  does  not  want 
gold,  or  bank  credit  in  the  form  of  bank  notes,  but  a  credit 
on  its  books.  The  banker,  therefore,  places  the  amount  to 
his  credit  and  permits  him  to  draw  checks  against  it.  On 
the  asset  side  of  the  statement  the  banker  has  the  obligation 
of  the  maker  of  the  note,  reinforced  by  the  indorsement  of 


402  THE    PRACTICAL   WORK  OF   A   BANK 

the  one  discounting;  and  as  a  b'ability  he  has  the  debt  cre- 
ated by  the  above  credit.  On  the  soundness  of  the  asset  de- 
pends the  soundness  of  the  liability;  for  the  banker's  chance 
of  receiving  back  the  funds  he  disburses  in  paying  the  checks 
depends  upon  the  goodness  of  the  instrument  in  his  leather 
portfolio. 

BANK  CREDIT  SHOULD  FACILITATE  EXCHANGES 

Theoretically,  no  advance  of  bank  credit  should  be  made 
in  any  form  except  to  facilitate  a  socially  productive  ex- 
change of  wealth,  the  final  payment  for  which  is  temporarily 
deferred.  Bank  credit  is  a  medium  of  exchange  whose  ex- 
istence is  made  possible  by  the  assumption  on  the  part  of  the 
bank  of  a  corresponding  liability  to  pay  cash  on  demand. 
The  nature  of  this  liability  precludes  the  use  of  bank  credit 
for  any  but  short  periods  of  deferred  payments  and  for  any 
purposes  except  bona  fide  exchange  transactions.  It  bridges 
the  gap  between  the  surrender  of  capital  and  the  receipt  of 
payment  for  it.  Its  purpose  is  to  anticipate  a  credit  al- 
ready established  rather  than  to  create  one  anew. 

Loans  made  simply  to  enable  an  owner  of  commodities 
to  hold  them  for  a  rise  do  not  grow  out  of  exchange  trans- 
actions. An  additional  medium  of  exchange  is  needed  only 
when  there  are  additional  exchanges,  and  the  holding  of 
goods  back  from  exchange  reduces  and  does  not  add  to  the 
number  of  such  exchanges.  However  profitable  speculative 
and  similar  loans  may  be  to  those  immediately  concerned, 
they  are  not  a  safe  basis  for  advances  by  note-issuing  or 
reserve-holding  banks.7 

CHANNELS  OF  MERCANTILE  CREDIT 

The  channels  of  mercantile  credit  are  four:  (a)  Finan- 
cing the  raw  material.  The  production  of  raw  goods  on  the 
farm  is  carried  on  largely  through  private  capital  or  person- 
al credit,  there  being  no  goods  to  pledge  except  those  in  ex- 
pectancy. The  crop-lien  system  of  the  South  is  illustrative 
of  this.  The  farmer  having  no  funds  to  plant  and  fertilize 
his  crop,  secures  credit  by  pledging  his  expected  crop  to  the 

^Eugene  E.  Agger,  Columbia  University,  in  "Journal  of  Political  Economy.' 


ESSENTIALS    IN    GRANTING    CREDIT  *08 

banker,  or  most  likely  to  the  merchant,  who  advances  the 
fertilizer,  the  food  for  the  hands,  and  the  implements,  taking 
as  security  a  mortgage  on  the  crop.  The  wheat  farmer  may 
borrow  on  his  note  at  the  bank,  with  or  without  security,  or 
likewise  obtain  credit  at  the  merchant's;  but  the  crop  lien  is 
peculiar  to  the  South.  The  cattle-raiser  may  obtain  a  chat- 
tel loan  with  his  cattle  as  security,  and  so  on  down  the  list, 
the  producer  pledging  the  thing  he  expects  to  raise,  is  rais- 
ing, or  hopes  to  raise,  most  frequently  to  a  bank,  as  security 
for  his  advances. 

From  the  producer  the  goods  go  to  (b)  the  manufactur- 
er, who  turns  them  into  finished  products.  But  this  is  to  a 
large  extent  (on  the  producer's  end)  a  cash  transaction,  the 
bank  making  the  advance  on  the  goods  when  shipped.  Raw 
material,  wool,  cotton,  wheat,  etc.,  moves  on  bills  of  ex- 
change with  bills  of  lading  attached.  These  are  sold  to 
banks,  one  after  another,  until  the  goods  reach  the  manu- 
facturer, who  not  having  capital  enough  to  carry  the  raw 
articles,  pledges  them  to  a  bank,  takes  them  out  of  ware- 
house as  needs  require,  and  pays  for  the  same  from  the 
sales  of  finished  products. 

(c)  Next  come  the  wholesalers,  jobbers  and  middle- 
men, who  find  the  retailer.    These  finance  their  transactions 
either  by  giving  the  manufacturer  their  notes,  or  by  borrow- 
ing in  the  market  and  paying  cash.     The  banks  still  carry 
the  debt  by  buying  the  receivables,  single-name  paper,  or  by 
loans  direct  to  the  dealer. 

(d)  The  retailers  now  come  in  to  dispose  of  the  goods 
to  the  final  consumers,  and  herein  comes  largely  the  book 
account  credit.    Of  course,  this  form  of  credit  exists  in  many 
of  the  other  processes,  but  in  retailing  especially.    These  ac- 
counts are  frequently  pledged  to  banks;  single-name  paper 
is  sold  largely  on  the  strength  thereof,  so  that  the  bank  in 
the  end  carries  the  credit  operation,  and  this  is  its  proper 
function. 

But  in  all  these  processes,  the  factor  of  commercial  credit 
runs.  If  the  mercantile  credit  is  sound,  the  banking  credit 
will  be  sound;  and  unsoundness  in  the  one  works  havoc  with 
the  other.  And  in  the  line  of  descent,  each  factor  has  the 
means  of  ascertaining  with  considerable  nicety  the  quality 
of  the  credit,  except  the  retailer,  and  upon  him  rests  the 
greatest  risk. 


IP 

llf 


03  £ 


31 


—  e 


S« 

o  o 

r 

i 

• 

h. 

O 

O 

" 

1 

I 

INDORSEES 
ITERAL 

83 

H  0 

X  ts 

2° 

1 

I     S 
1    * 

K        " 

1        ^ 

1        " 

1 

*         . 

j          § 

t       ?g 

-  ^i 

"o 

8 

ESSENTIALS    IN    GRANTING    CREDIT  405 

The  tendency  of  the  times  is  to  eliminate  the  middleman, 
and  sell  from  mill  to  retailer  and  cut  out  the  additional 
profits  that  must  be  added  to  selling  prices  as  more  handling 
becomes  necessary.  For  every  process  there  must  be  a 
profit.  If  the  manufacturer  sells  to  the  jobber  in  the  large 
city,  and  he  to  the  jobber  in  the  small  city,  and  he  to 
the  merchant,  and  he  to  the  consumer,  there  must  be  the  cost 
of  many  handlings  and  a  profit  for  the  capital  that  is  neces- 
sary in  the  various  transactions,  together  with  remuneration 
for  the  proprietor. 

BUYING  AND  SEIZING  WITHOUT  CASH 

Whatever  the  financial  process,  the  bank  intervenes  and 
buys  the  credit  instrument.  It  is  possible  to  carry  a  cargo 
of  cotton  from  planting  to  consumption  by  the  use  of  mer- 
cantile credit  reinforced  by  banking  capital  to  buy  the  in- 
struments. To  illustrate:  the  cotton  planter  in  the  South 
has  no  money.  He  goes  to  the  bank  and  gives  his  note,  se- 
cured by  a  crop  in  expectancy.  He  might,  as  many  now  do, 
and  as  has  been  the  custom  in  the  past  quite  largely,  go  to 
the  village  storekeeper  and  get  his  seed  and  his  plow  and 
groceries  for  the  hands  and  himself  while  the  crop  is  matur- 
ing, turning  in  his  cotton  when  harvested  to  pay  his  debt  and 
carry  him  until  planting  time  comes  again;  but  in  the  end 
the  bank  will  carry  the  burden,  for  the  merchant  will  borrow 
of  the  bank  to  biay  the  goods  that  feed  the  farmer.  The 
crop  matures.  It  is  gathered,  ginned,  baled  and  shipped, 
and  the  loan  to  the  bank  or  merchant  is  cancelled. 

In  order  to  show  further  the  practical  uses  of  commer- 
cial credit,  and  the  possibility  of  moving  a  consignment  of 
goods  from  producer  to  consumer  without  the  use  of  indi- 
vidual capital,  and,  in  fact,  without  the  use  of  money  ex- 
cept in  the  open  markets  of  Europe,  it  is  proposed  to  trace 
such  a  transaction  in  detail.  The  incidental  expenses  such 
as  freight  and  insurance,  etc.,  must  be  paid  for  in  cash;  but 
the  merchandise  is  paid  for  from  money  accumulations  in 
the  broad  market. 

Let  us  suppose  that  a  Texas  merchant  becomes  a  cotton 
buyer.  He  has  no  adequate  funds,  and,  therefore,  arranges 
with  his  bank  to  honor  checks  given  by  him  to  various  farm- 
ers for  cotton  purchases,  the  security  to  be  the  cotton  placed 

97 


K)6  THE    PRACTICAL   WORK   OF    A    BANK 

in  warehouse  and  warehouse  receipts  lodged  with  the  bank 
as  security  for  the  advances.  As  the  checks  are  presented 
they  are  credited  to  the  farmers'  accounts. 

The  Texas  buyer  sells  the  cotton  to  a  New  York  ex- 
porter. Draft  for  the  amount  is  drawn,  documents  at- 
tached, and  handed  to  the  Texas  bank  for  credit  to  the  mer- 
chant's account,  which  pays  his  debt  to  the  bank. 

The  Texas  bank  sends  the  draft  to  its  New  York  corre- 
spondent for  collection  and  credit. 

The  New  York  bank  presents  the  draft  to  the  exporter 
and  is  told  that  a  like  amount  of  cotton  of  the  same  grade 
has  been  sold  to  a  Liverpool  merchant  and  is  ready  to  move. 
The  exporter,  therefore,  makes  payment  by  handing  a  draft 
with  shipping  documents,  to  the  bank,  which  sells  the  draft 
and  from  the  proceeds  paj^s  the  Texas  draft,  by  crediting 
the  Texas  bank  with  the  amount. 

In  handling  commodities  which  move  by  slow  freight, 
and  which  are  of  standard  grades,  it  is  common  practice  to 
honor  drafts  against  the  same,  which,  of  course,  travel 
faster,  by  securing  bank  loans  on  the  commodity,  lodging 
the  bills  of  lading  as  security  for  goods  in  transit,  and  ware- 
house receipts  for  goods  in  storage.  When  a  quantity  of 
goods  is  sold  and  is  to  be  released,  the  bank  would,  of  course, 
credit  the  shipper  with  the  draft  presented  as  an  offset  to 
his  loan.  If  more  margin  should  be  required,  it  would  be 
furnished  by  lodging  additional  bills  of  lading,  even  for 
goods  not  yet  arrived.  In  the  grain  trade  there  is  a  con- 
stant shifting  of  bills  of  lading  as  goods  move  in  and  out 
of  the  merchant's  possession;  the  idea  being  that  the  bank 
shall  have  a  lien  on  the  goods,  irrespective  of  where  they 
may  be.  It  makes  advances  against  goods  coming  in,  and 
credits  payments  against  goods  moving  out,  the  security  in 
both  cases  being  in  its  possession  of  the  bills  of  lading. 

The  New  York  bank  forwards  the  draft  to  a  Liverpool 
bank  which  presents  to  the  spinner.  He  accepts,  the  draft 
is  sold  in  the  market  and  proceeds  credited  to  New  York. 

Having  sold  the  cotton  to  a  spinner  on  a  sixty-days' 
draft,  the  cotton  goes  to  the  mill  for  manufacturing  into 
cloth. 

The  cotton  having  been  turned  into  cloth,  is  sold,  let  us 
assume,  to  a  New  York  jobbing  house.  The  goods  go  for- 
ward, draft  is  drawn  on  London,  where  an  acceptance  has 


ESSENTIALS    IN    GRANTING    CREDIT  407 

been  arranged  by  the  New  York  house.  The  draft  is  pre- 
sented to  the  London  bank,  accepted  and  sold  in  the  mar- 
ket, documents  released  and  sent  to  New  York.  From  the 
proceeds  of  this  draft  the  spinner  will  meet  his  acceptance 
due  in  Liverpool.  The  goods  are  now  in  the  jobber's  hands, 
a  note  running  to  the  New  York  bank  to  secure  it  for  the 
acceptance,  in  the  latter's  possession. 

The  jobbing  house  has  sold  the  goods  to  the  same  mer- 
chant in  Texas  who  purchased  the  cotton  from  the  farmers. 
The  goods  are  shipped  and  payment  made  therefor,  by  note 
at  sixty  days,  which  the  New  York  house  lodges  with  the 
New  York  bank.  On  the  strength  of  this  note,  the  New 
York  bank  could  remit,  several  days  before  the  acceptance 
which  it  arranged  with  the  London  bank  is  due,  an  amount 
sufficient  to  take  up  the  acceptance.  But  having  credit  with 
the  Liverpool  bank  for  the  proceeds  of  the  cotton  draft,  it 
sends  a  banker's  draft  for  the  amount  and  the  transaction 
is  closed. 

The  goods  are  sold  to  the  farmers  on  thirty  days'  book 
credit.  When  the  farmers  pay  their  debts,  they  will  draw 
checks  on  the  bank  to  the  order  of  the  merchant,  which  the 
merchant  will  'deposit  to  his  account,  and  when  his  note  is 
due,  the  New  York  bank  which  discounted  the  note  will 
send  it  home  for  payment,  and  it  will  be  charged  to  his  ac- 
count, and  paid  by  New  York  draft  against  the  balance  of 
the  Texas  bank.  From  start  to  finish,  therefore,  the  bank- 
ing machinery  here  crudely  outlined  will  have  carried  the 
debts  as  they  passed  from  one  stage  to  another. 

Out  of  these  operations  in  mercantile  credit  arise  the  in- 
struments of  banking  credit,  promissory  notes,  bills  of  ex- 
change, drafts  and  book  accounts.  The  mercantile  world 
furnishes  the  transaction  and  the  instrument;  the  banking 
world  the  cash  for  the  foundation  and  the  machinery  for  the 
credit  operations.  The  evidence  of  one  debt  is  the  founda- 
tion for  another.  Thus  the  note  of  the  merchant  discounted 
by  a  bank  affords  the  basis  of  the  credit  to  the  discounter's 
account,  against  which  he  checks ;  and  now  affords  the  founda- 
tion for  the  issue  of  our  currency,  for  by  the  Federal 
Reserve  Act,  Federal  Reserve  notes  may  be  issued  secured 
by  paper  eligible  for  rediscount,  the  Federal  Reserve  Bank 
carrying  a  reserve  of  forty  per  cent,  in  gold  and  100  per 
cent,  in  commercial  paper  against  notes  so  issued.  The 


1-08  THE   PRACTICAL  WORK  OF   A  BANK 

debt  of  one  country  to  another,  of  the  bank  to  the  depos- 
itors, and  the  bank  to  the  public  in  general,  rests  in  the  last 
analysis  upon  the  credit  instrument  which  arises  from  the 
transaction  between  two  dealers.  Prendergast  in  "Credit 
and  Its  Uses"  well  says:  "Commercial  credit  merges  itself 
into  banking  credit  by  purely  natural  processes,  which  in 
turn  assume  the  control  of  the  commercial  market  in  a  uni- 
versal sense." 

CHANGING  CONDITIONS  IN  MERCANTILE  CREDIT 

The  changing  conditions  in  mercantile  credit  are  the  out- 
come of  the  Civil  War.  Prior  to  that  time  the  merchants 
bought  on  long-time  credit,  giving  their  notes.  But  the  un- 
certainties of  the  value  of  the  greenbacks  led  merchants  to 
offer  cash  discounts  for  prompt  payment,  and  in  order  to 
take  these  discounts,  which  are  often  liberal  and  highly 
profitable,  the  merchant  now  sells  his  paper  through  brokers 
and  pays  cash  within  the  discount  period.  Thus  we  have 
the  cash  discount  system  and  the  single-name  paper.  The 
longest  terms  known  to  the  writer  on  open  account  are  in 
the  textiles,  where  discounts  are  allowed  as  long  as  four 
months  from  date  of  invoice,  and  this  frequently  dated 
ahead. 

The  buyer  no  longer  takes  his  semi-annual  trips  to  mar- 
ket, being  visited  by  travelling  salesmen  weekly,  monthly  or 
seasonally.  Although,  where  it  is  a  matter  of  style,  buyers 
to  a  large  extent  still  make  their  periodical  trips  to  the  large 
city  to  see  the  assortments.  The  mercantile  agency  has 
made  it  no  longer  necessary  that  the  buyer  and  seller  know 
each  other  personally.  Some  large  houses  sell  by  catalogue 
only  and  the  personal  equation  never  exists.  Moreover,  the 
cold  analysis  of  the  credit  department,  now  a  part  of  all 
large  concerns,  makes  personal  contact  unnecessary  to  de- 
termine the  risk,  important  as  personal  contact  may  be. 

MERCANTII.E  CREDIT  TERMS 

The  terms  of  mercantile  credit  should  be  on  an  economic 
basis.  They  should  not  be  longer  than  is  needed  to  turn  the 
goods  into  the  next  process.  The  buyer  should  pay  for  his 
goods  as  soon  as  he  has  sold  them;  for  in  selling,  an  instru- 


ESSENTIALS    IN    GRANTING    CREDIT  409 

ment  will  arise  that  can  be  turned  into  money  to  liquidate 
the  first  debt.  As  wholesale  groceries  can  be  turned  in  from 
one  to  two  months  they  should  be  paid  for  within  that  time 
and  the  credit  term  be  no  longer.  The  farmer  needs  longer 
time  to  turn  soil  chemicals  into  wheat  and  six  months  might 
not  be  too  long  for  him.  Retail  groceries  may  be  turned 
two  or  three  times  a  month  and  meats  two  or  three  times  a 
week,  and,  therefore,  short  credit  arises;  while  dry  goods 
would  take  longer,  being  less  perishable  but  slower  in  selling, 
and  subject  to  fashions.  The  cash  discount  is  so  firmly  es- 
tablished that  it  is  now  a  fixed  policy,  and  this  makes  the 
credit  term,  as  a  rule,  short.  Banking  credit  is  longer,  has 
no  premium  on  promptness,  but  a  penalty  on  laxness. 


INSTRUMENTS  or  CREDIT  IN  MERCANTILE  TRANSACTIONS 

The  credit  instruments  used  in  mercantile  dealings  are: 
(a)  Book  accounts.  It  may  seem  superfluous  to  describe 
the  book  account  as  a  credit  instrument,  but  analyzed  it 
simply  means  that  the  seller  delivers  the  goods,  charges  the 
buyer  on  his  ledger,  renders  invoice  and  statement,  with 
terms  of  sale,  collects  at  the  end  of  the  credit  term,  payment 
probably  being  made  by  check,  and  the  transaction  is  closed. 
No  circulating  credit  has  arisen;  and  until  recent  years  no 
pledgable  security  came  out  of  the  operation;  it  was  strictly 
between  the  two.  But  the  seller  can  now  avail  himself  of 
the  proceeds  of  the  sale  by  hypothecating  the  book  account 
as  hereafter  described. 

The  book  account  has  no  evidence  on  the  part  of  the 
buyer  that  he  agrees  to  the  terms  of  the  sale,  except  the  ac- 
count stated,  which  is  passive  and  not  active  assent.  In  a 
negotiable  instrument,  however,  the  maker  consents  to  the 
time,  the  amount  of  the  credit,  and  agrees  to  pay  it.  The 
dishonor  of  a  book  credit  is  not  so  serious  a  matter  as  the 
dishonor  of  a  promissory  note.  If  the  book  account  be  paid 
a  few  days  after  its  due  date,  it  is  quite  satisfactory,  and 
the  cash  oliscount  often  allowed;  but  to  allow  a  note  to  run 
over  even  a  day  is  to  invite  protest,  and  protest  means  dis- 
credit. 


410  THE    PRACTICAL   WORK   OF   A   BANK 

BOOK  ACCOUNTS  AS  SECURITY 

Book  accounts — open  credits,  dealer  with  dealer — are 
presumed  to  be  settled  at  the  end  of  the  credit  term,  but  are 
not  rigid  in  their  maturity  as  are  negotiable  instruments. 
They  are  sometimes  settled  by  note,  as  in  lumber,  raw  silk, 
etc.,  but  generally  in  cash,  which  is  obtained  from  the  sale 
of  single-name  paper.  They  are  frequently  used  as  the  basis 
of  credit,  by  pledging  with  bankers,  factors  and  "commer- 
cial bankers,"  who  make  a  business  of  loaning  on  accounts 
receivable.  So  common  is  this  practice  that  many  firms  have 
their  bill-heads  printed  with  the  notation:  "This  bill  assigned 

to and  all  payments  must  be  made  to 

them."  Large  and  important  houses  in  New  York  and 
other  cities  now  buy  these  book  accounts,  and  make  advances 
in  part  or  up  to  the  full  amount,  charging  in  proportion  to 
the  risk  assumed  and  the  amount  advanced.  A  del  credere 
commission  man  or  factor  is  one  who  insures  the  credit  he 
opens  when  he  makes  a  sale  of  his  principal's  goods,  and 
guarantees  the  payment  of  the  same,  for  which  guaranty  he 
receives  a  large  fee  and  assumes  great  risks.  Some  banks 
will  loan  on  book  accounts  and  others  will  not;  but  they 
are  coming  to  be  quite  a  common  security. 

The  methods  of  utilizing  book  accounts  as  security  are 
two:  (a)  Selling  outright,  the  buyer  assuming  the  risk  of 
collection,  for  which  risk  he  charges  his  full  toll;  (b)  pledg- 
ing the  accounts  as  security,  receiving  only  part  of  their 
value,  the  pledger  agreeing  either  to  turn  in  others  to  keep 
the  margin  good,  or  to  turn  all  proceeds  over  to  the  lender 
as  payments  are  made.  It  has  been  held  recently  in  New 
York  that  such  an  operation  is  in  violation  of  the  banking 
and  corporation  laws  which  forbid  other  institutions  than 
banks  doing  a  discounting  business,  and  such  a  contract  of 
sale  is  void. 

The  factor  is  in  some  cases  a  firm  of  considerable  wealth, 
able  to  maintain  a  large  organization,  and  employ  a  highly- 
paid  credit  man,  and  is  able  to  borrow  in  the  open  market 
on  single-name  paper  or  by  banking  connections  obtain  the 
credit  needed  to  carry  on  the  discounting  operations. 

The  selling  of  book  accounts  is  liable  to  gross  frauds, 
and  it  becomes  needful  that  the  account  be  confirmed  over 


ESSENTIALS    IN    GRANTING    CREDIT  411 

the  debtor's  signature  to  be  sure  that  the  account  is  not  a 
fictitious  one. 

ASSIGNED  ACCOUNTS  A  MENACE® 

The  growing  practice  of  loaning  on  assigned  accounts 
constitutes  a  constant  menace  to  the  banker  whose  advances 
are  made  on  the  general  security  of  the  assets,  particularly 
those  described  as  quick.  The  number  of  corporations  or- 
ganized for  financing  in  this  way  is  steadily  increasing 
and  the  ease  with  which  credit  can  be  obtained  is  a  constant 
temptation  to  the  small  borrower  to  overtrade.  It  has  also 


Business     Loans. 

Forty-five  cunts  a  Una. 


Manufacturers,    wholesalers,    outstanding  ac 

counts  financed,   notes  discounted.     KOtyn, 

194  Bowery.     (Bank  Building.) 

Manufacturers'  and  wholesalers'  outstanding 
accounts  financed,   notes   purchased.     N*>- 
sau   Finance.   119   Nassau. 


Merchants  and  manufacturers'  accounts 
.  notes,  second  mortgages.  Victor  Beaver 
39  East  42d. 

Make  loans  outstanding  accounts,  notes,  bank 
books.    Security  Finance  Co.,  149 


ADDITIONAL  CAPITAL  REQUIREMENTS 
furnished  to  manufacturers  and  wholesalers; 
advances  on  accounts  and  merchandise.  Con- 
fldentlal.  Principals  only.  Wormser  &  Co., 
Commercial  Bankers,  95  Sth  Av.,  N.  T.  City. 

ADVERTISEMENTS   IX    THE    NEW   YORK   TIMES    OF  CONCERNS   DISCOUNTING    BOOK    ACCOUNTS 

given  rise  to  a  species  of  fraud  which,  unless  promptly 
checked,  will  prove  very  dangerous  for  those  who  make  such 
advances. 

A  New  York  manufacturing  concern  with  a  number  of 
subsidiaries  recently  went  into  bankruptcy  and  the  active 
official  disappeared  from  his  accustomed  haunts.  It  soon 
developed  that  in  addition  to  direct  loans  from  banks  he 
had  been  financing  his  enterprises  by  the  sale  of  accounts  to 
two  large  commission  houses  in  New  York  City  who  make 
a  specialty  of  cashing  accounts.  It  is  alleged  that  concern 
"A"  would  ship  goods  to  "B"  and  pledge  the  invoice  with 
the  commission  merchant.  "B"  would  ship  the  goods  to 
"C,"  make  out  a  bill,  go  to  the  commission  merchant  and 
secure  a  loan  on  it.  "C"  would  repeat  the  operation  to  "D" 

8K.  B.  Snyder,  Assistant  Cashier  First  National  Bank,  Philadelphia,  before 
Philadelphia  Chapter,  A.  I.  B, 


412  THE   PRACTICAL  WORK  OF   A   BANK 

and  "D"  to  "E"  and  "E"  to  "A"  until  five  advances  had 
been  made  on  the  same  lot  of  goods.  The  skilled  financier 
was  later  found  across  the  Mexican  border  where  he  had 
gone,  as  he  said,  for  his  health.  His  illness  must  have  had  a 
very  deteriorating  effect  on  his  memory  as  he  was  traveling 
under  a  name  entirely  different  from  the  one  by  which  he 
was  known  in  New  York.  Pledging  accounts  may  serve  as 
a  useful  purpose  with  certain  classes  of  merchants  who  can 
thus  obtain  funds  to  discount  their  bills  when  their  bank 
credit  is  not  sufficiently  good  for  single-name  accommodation. 
The  discounts,  however,  must  be  very  substantial  as  the  esti- 
mated cost  of  this  method  of  borrowing  is  from  seventeen 
to  thirty-six  per  cent.  Where  it  is  indulged  in  the  banking 
of  the  borrower  should  all  be  done  with  the  institution  mak- 
ing such  advances  and  his  financial  affairs  should  at  all  times 
be  the  subject  of  the  closest  scrutiny. 

DATING  AHEAD 

The  dating  ahead  principle  arose  from  the  necessities  of 
manufacture.  In  such  lines  as  staples,  small  stocks  may  be 
carried,  and  bought  as  required:  while  in  fashionable  goods, 
they  must  be  made  to  order  and  to  suit  the  tastes  of  the 
buyer.  Thus,  in  a  line  such  as  ladies'  garments,  samples 
are  made  up  and  taken  out  to  the  retailers  for  inspection, 
and  orders  taken  months  in  advance  of  the  season.  Orders 
for  spring  goods  are  taken  in  the  fall  and  vice  versa.  As 
soon  as  the  goods  are  made  up,  they  are  delivered  as  per 
agreement,  the  invoice  to  be  dated  ahead.  For  instance,  the 
goods  would  be  delivered  for  the  spring  trade  in  January, 
the  invoice  to  be  dated  as  of  March  1st,  and  the  terms  of 
credit  would  run  from  that  time.  Thus,  a  department  store 
may  have  a  sale  of  furs  in  August,  agreeing  that  no  pay- 
ments are  to  be  made  until  November  1.  It  must  either 
carry  the  credit  itself,  or  pass  it  back  to  the  fur  manufac- 
turer. This  it  does  by  having  the  invoices  dated  as  of  No- 
vember 1,  the  term  of  credit  running  from  that  time,  and 
it  will  meet  its  bills  as  the  customers  meet  theirs.  The  man- 
ufacturer may  in  turn  sell  his  book  accounts. 

In  dating  ahead  the  buyer  is  not  only  entitled  to  the  cash 
discount,  but  to  interest  for  the  unexpired  time.  For  in- 
stance, a  bill  of  goods  is  delivered  on  February  1.  The  dat- 


ESSENTIALS    IN    GRANTING    CREDIT  418 

ing  is  March  1,  2/10  net  30,  and  the  bill  becomes  due  March 
31.  If  it  is  paid  any  time  before  March  10,  the  discount 
follows.  But  if  paid,  let  us  say,  February  15,  not  only 
would  the  two  per  cent,  be  deducted,  but  also  interest  at  the 
legal  rate  for  the  unexpired  time  of  the  credit. 

Department  stores  frequently  agree  to  date  bills  ahead 
to  attract  trade  and  to  avoid  holiday  rushes.  Thus,  pur- 
chases made  in  October  may  be  dated  as  of  December  1, 
bringing  the  maturity  of  the  bill  over  into  the  new  year. 

The  second  form  of  mercantile  credit  is  the  promissory 
note,  which  needs  no  comment.  It  may  be  single-name  or 
two-name,  but  it  is  a  promissory  note  whatever  the  form. 
There  is  also  the  bill  of  exchange  by  which  the  seller  draws 
on  the  buyer,  as  in  grain  and  other  basic  products,  raw  mate- 
rial moving,  as  a  rule,  on  draft  with  bill  of  lading.  There 
will  come  to  be  shortly,  as  now  obtains  quite  generally  in 
Europe,  the  acceptance  credit,  whereby  the  buyer  accepts 
the  bill  of  exchange  and  thereby  agrees  to  pay  it  at  matu- 
rity, the  instrument  going  into  the  money  market  as  an 
"acceptance,"  and  settling  the  book  account  as  the  promis- 
sory note  now  does  in  this  country.  Late  reports  of  the 
Federal  Reserve  Banks  show  about  thirty-six  per  cent,  of 
their  loans  to  be  in  the  form  of  acceptances  purchased. 

THE  MERCANTILE  CREDIT  FIELD 

The  mercantile  credit  man  labors  in  a  field  widely  differ- 
ent from  that  of  the  bank  credit  man.  Many  of  the  credits 
granted  in  the  day's  work  in  a  business  house  are  so  small 
as  to  require  but  little  investigation,  other  than  looking  up 
in  the  agency  reports,  and  the  loss  would  be  trifling;  while 
in  banking,  especially  in  large  cities,  the  loans  are  of  much 
larger  average. 

A  business  house  has  also  the  advantage  of  being  able 
to  adjust  its  prices  to  the  risk,  and  may,  in  a  measure,  in- 
sure the  credit  by  an  advance  in  prices;  but  the  bank  man 
has  but  one  price  to  all  and  this  is  fixed  by  law. 

Moreover,  the  mercantile  credit  man  deals  largely  with 
those  in  one  line  and  can  specialize,  while  the  banker,  unless 
he  too  specializes — and  this  he  should  not  do — must  know 
many. 

The  giving  of  statements  in  mercantile  credit  is  not  so 


H4       THE  PRACTICAL  WORK  OF  A  BANK 

general  as  in  banking  credit,  the  information  being  ob- 
tained from  other  sources,  although  the  statement  is  here 
becoming  recognized  as  necessary  also. 

Not  only  is  the  character  of  the  credit  on  a  less  secure 
foundation  as  it  gets  nearer  the  final  consumer,  but  the 
property  risk  is  less  valuable  as  a  backbone  to  the  structure. 
For  instance,  the  accounts  receivable  of  a  wholesale  house 
are  good  collateral — they  have  been  selected;  they  are  good 
liquid  assets;  but  the  accounts  on  the  books  of  the  village 
grocer  are  uncertain  of  collection,  slow  and  highly  danger- 
ous as  credit  risks.  He  has  not  selected  his  risks  as  care- 
fully as  has  the  man  higher  up.  He  did  not  know  how,  and 
could  not  be  very  strict  if  he  did.  And  if  he  borrows  he 
must  do  so  from  his  local  bank  on  his  general  reputation, 

THE  ENORMOUS  COST  OF  RETAIL  SELLING 

All  well-managed  concerns  analyze  their  business.  De- 
partment stores  do  so  for  each  department,  carefully  analyz- 
ing prices,  mark-ups  and  mark-downs,  sales,  discounts  and 
expenses.  Conditions  vary  so  greatly  that  one  merchant 
cannot  guide  himself  by  the  experiences  of  another.  One 
may  pay  a  rent  of  $50,000  and  the  other  but  half  that  sum, 
and  both  sell  to  the  same  trade.  Three  stores  are  men- 
tioned as  selling  approximately  $1,500,000  yearly,  one 
paying  $65,000  rent  in  Indiana,  one  $45,000  in  New  York, 
and  one  $30,000  in  Ohio.  One  pays  ten  times  more  for  in- 
surance than  does  the  other.  Obviously  their  selling  prices 
for  the  same  articles  will  vary. 

One  store  will  consider  a  gross  profit  of  thirty-three  per 
cent,  ample;  while  others  will  be  satisfied  with  less.  The 
mark-ups  range  from  twentj^  to  fifty  per  cent.,  depending 
upon  the  department,  but  the  average  is  from  thirty  to 
thirty-three  per  cent. 

When  you  go  into  a  department  store  and  select  a  pair 
of  gloves  and  leave  your  address,  and  expect  to  find  them 
when  you  arrive  home  for  dinner,  you  give  little  thought  to 
the  cost  of  placing  those  gloves  in  your  possession.  You 
have  become  so  accustomed  to  service,  quick,  efficient  and 
accurate,  and  to  include  the  little  things  of  life,  that  you 
take  it  as  a  matter  of  course. 

Without  much  argument  it  must  be  apparent  that  to 


ESSENTIALS    IN    GRANTING    CREDIT  415 

conduct  a  large  establishment,  with  thousands  of  clerks,  ex- 
pensive rent,  quick  and  extensive  deliveries,  is  costly.  And 
every  purchase  must  bear  its  proportion  of  that  cost;  and 
the  consumer  pays.  The  cost  of  the  article  is  but  a  part  of 
its  selling  price.  The  shopper  comes  into  contact  with  a 
salesperson,  and  forgets  the  vast  army  of  employees  out  of 
sight,  but  no  less  necessary  to  the  smooth  working  of  the 
machinery.  There  must  be  the  buying  force,  the  stock 
force,  the  selling  force,  the  credit  force,  the  accounting 
force,  the  delivery  force,  and  the  supervising  and  executive 
force.  And  your  pair  of  gloves  must  pay  something  to  each. 

The  cost  of  doing  business  has  increased  so  fast  of  late 
years  that  it  is  officially  stated  that  large  concerns  are  satis- 
fied to  make  as  net  profit  their  cash  discounts. 

In  a  pamphlet  issued  by  Ernst  and  Ernst,  certified 
public  accountants,  New  York,  the  pair  of  gloves  referred 
to  are  thus  analyzed  to  show  the  distribution  of  cost  of 
sale  :9 

VOST  OF  THE  SALE  OF  PAIR  OF  $1.50  GLOVES. 

.6667% — Manufacturer's  price    $1.00 

.0067%— Freight,   &c 01 

.08%     — Salesperson    12 

.02%     —Rent     03 

.0067% — Insurance  and  taxes   01 

.02%     — Advertising    03 

.0533% — Office    expense    08 

.0666% — General  store  expense   10 

.04%     — Delivery    expense    06 


$1.44 
.04%     —Profit     06 


100.00%  $1.50 

FRAUDS  IN  MERCANTILE  CREDIT 

Great  frauds  are  possible  in  mercantile  credit  because 
of  the  ease  with  which  statements  and  accounts  may  be  jug- 
gled and  frauds  covered.  This  is  particularly  true  of  mer- 
chandise, where  a  few  figures,  more  or  less,  are  easy  to 
make  and  hard  to  discover.  The  picture  was  recently  pre- 
sented in  court  of  a  prominent  merchant  compelling  his  book- 
keeper to  inflate  the  merchandise  account  in  order  to  show 
a  profit  where  a  loss  occurred.  In  a  big  concern,  handling 

•New  York  Times,  April  6th,  1914. 


416 


THE    PRACTICAL   WORK   OF    A   BANK 


CQ 


ol  £ 

^H    *     ^ 

oo  H  |  « 

s  <f  ,' 

^    ^  o  b 

*  Ze  S 

M 

fr,  U      •*• 

T4   «     FH 

r  B  o 

H  *  « 

^  j  o    rl 


w 

H 


si;; 

II 

<2  o    •  v 

ill! 

1    5  1  1   1 

ess  mortgages 

j 

c    J8   -S     u"     o 

s 

^ 

O    J3     2    x>      4! 

•a*  .s  !  i  | 

o     o   "3     t!     _,     1 

c 

£ 
3 

y 

-.  2  1  .s  a  | 
3  §  i  §  3  £ 

i 

O 

"« 

i 

i 

1  !  s  1  1  S 

a  TS  a  a  1    : 

1      V 

SH 

B  J  M 


JO  PUB  'SJ3SSY  fliOO 


ESSENTIALS    IN    GRANTING    CREDIT 


417 


• 

•    «            :      «      : 

i    :            '•      *t    ':    ':    ':    ':    :.         •     • 

•    '            ''•      i!    :    :    :    i    :         ;     j 
'•    :&        :      *£    :    i    i    :    :             i 

;  :g     ;    |a  ;  :  :  :  i  ;  ;  ; 

JB  is     v    n  - 

LIABILITIES. 

g  J  2        :        I    ::.::::: 
»   «•  §         :        2     :::::::: 
o-28        :       <:!:!:::: 

«>gy              •                      

•g   2  .§"§::§          :::...:: 

liiiiii  1  1  i  !  Nj  j 

SIlHUl             1  j 

TOTAL, 

:K  ASSETS  


-QUICK 

£    a   o  c    3  *    o-0;-:;     :    :  -S   -S 

ftttll'i            Mil 

3   g 

0>    h! 

(/ 
t/ 
b 

£»    c*    2P  t*4     y    w     u»             3     — 

t2  £  (2  o   <  <  -a       '  •  '  °   ^ 
»   -  j  t    S  3    a.          •pasodmiMiBiiMjo 

|1«5  55-03   P  "ainawapin  TO) 

TOTAL 
LIABIL1 

t. 

X 
(i 

SALES.. 

418  THE   PRACTICAL   WORK   OF   A   BANK 

millions  of  dollars'  worth  of  goods  yearly,  and  whose  stock 
runs  into  the  six  figures,  to  add  a  few  ciphers  here  and 
there  to  the  inventory  is  not  difficult,  and  only  a  physical 
revaluation  will  disclose  the  exact  state  of  affairs,  although 
an  expert  accountant  could, verify  an  inventory  to  a  fair  de- 
gree of  certainty  without  this  lengthy  process.  The  amount 
of  goods  on  hand  at  the  beginning  of  the  term,  plus  the 
purchases,  minus  the  sales,  must  equal  the  present  inven- 
tory; but  if  accurate  records  are  not  kept,  or  other  frauds 
indulged  in,  it  is  not  easy  to  detect  an  irregularity,  and  only 
re-inventory  will  accurately  determine  conditions. 

The  banker  must  pin  some  faith  in  the  statement  of  con- 
dition, and  cannot  always  require  an  expensive  and  ex- 
haustive audit  for  credit  purposes,  and  the  remedy  would 
seem  to  be  to  severely  penalize  false  statements.  The  ad- 
vent of  the  Federal  Reserve  Banks  and  the  credit  opera- 
tions outlined  in  their  ruling  of  November  10,  1914,  indi- 
cate a  step  in  the  right  direction;  for  it  is  the  obvious  pur- 
pose to  require  statements  of  all  firms  whose  paper  is  of- 
fered for  rediscount,  attested  by  oath,  and  it  will  doubtless 
follow  that  certified  audits  will  presently  be  required.  Clear- 
ing-houses have  already  taken  such  steps  as  a  matter  of  good 
banking  policy. 

The  uncertainty  of  mercantile  credit  and  the  frauds  pos- 
sible in  such  lines  have  resulted  in  credit  bureaus,  connected 
with  all  the  leading  industries  that  specialize  in  the  credits 
of  their  own  trade. 

These  credit  bureaus  have  such  complete  reports  of  the 
men  engaged  in  the  particular  line  that  a  detailed  history  of 
the  individual  may  be  obtained  upon  request.  They  keep 
close  watch  upon  the  operations  of  the  men  in  the  trade, 
and  follow  up  bankruptcies  and  assignments.  For  instance : 
the  best  hat  manufacturers  sell  their  product  through  about 
a  dozen  commission  houses.  These  commission  men  work 
in  harmony,  employ  an  actuary  to  whom  all  orders  and 
payments  are  reported.  Having  a  record  of  past  pur- 
chases and  payments,  the  actuary  is  able  to  check  the  busi- 
ness operations  of  the  trade.  He  will  know  if  a  merchant 
is  buying  beyond  his  means.  Business  is  not  spasmodic, 
but  of  slow  growth,  and  a  sudden,  heavy  order  ma}'  be 
the  forerunner  of  a  failure.  The  actuary  will  detect  the 
dishonest  buyer,  perhaps  in  time  to  report  him  as  unde- 


ESSENTIALS    IN    GRANTING    CREDIT  418 

sirable.  The  way  a  man  takes  his  discounts,  cancels  orders, 
returns  goods,  etc.,  may  all  be  known  because  of  the  har- 
mony in  the  central  credit  bureau. 

These  credit  bureaus  go  into  the  moral  side  of  a  man 
closer  than  the  large  agencies  are  able  to  do,  for  they  cover 
a  special  field,  and  can  concentrate.  They  know  the  field, 
the  various  towns  and  cities,  from  their  particular  view- 
point. For  instance,  in  a  city  like  Schenectady,  N.  Y.,  em- 
ploying large  numbers  of  men,  hats  and  men's  wear  in  gen- 
eral would  find  a  profitable  field;  but  if  a  strike  should 
occur  in  the  General  Electric  works  it  would  soon  affect 
every  line  catering  to  men.  Thus,  the  special  credit  bureau 
follows  economic  conditions,  and  advises  its  clients  accord- 
ingly. Likewise  a  failure  of  crops  in  an  agricultural  sec- 
tion will  have  its  effect  upon  certain  lines. 

Associations  of  credit  men  are  operating  local  credit  bu- 
reaus which  check  local  credits,  and  interchange  with  other 
local  credit  bureaus,  so  that  first-hand  information  may  be 
had  of  any  merchant  in  any  town  supporting  a  credit  man's 
association. 

In  Philadelphia  there  are  eighteen  jobbing  houses  which 
handle  a  product  of  such  bulk  that  the  retailer,  in  order  to 
make  a  profit,  must  purchase  in  his  home  market,  as  freight 
is  practically  prohibitive.  These  eighteen  houses  have  an 
association  which  conducts  a  small  mercantile  agency  con- 
taining the  names  of  all  purchasers  in  this  particular  line. 
Each  member  furnishes  the  agency  at  regular  intervals  with 
a  statement  of  the  retailer's  standing  with  him,  which  is  in 
turn  transmitted  to  the  other  members.  In  this  way  it  is 
possible  to  keep  a  complete  check  on  all  houses  in  this  line 
and  losses  from  bad  debts  can  be  practically  eliminated 
unless  the  jobber  goes  against  the  unfavorable  experience 
of  his  associates. 

THE  MERCANTILE  STATEMENT 

The  property  of  a  mercantile  dealer  can  be  correctly  as- 
certained only  from  his  statement,  and  this  is  coming  to  be 
the  focal  point  of  all  credit  operations.  Not  what  the  man 
says  he  is  worth;  not  what  he  seems  to  be  worth;  not  what 
his  bank  thinks  he  is  worth;  but  what  he  is  worth  as  tested 
by  an  audit  made  by  an  independent  party  who  knows  how, 
and  does  it  with  full  knowledge  of  accounting  principles,  can 
be  the  foundation  of  safe  credit. 


420  THE   PRACTICAL  WORK  OF   A   BANK 

No  man  can  go  into  a  store  and  look  around,  and  say: 
"This  man  is  good  for  a  thousand  dollars'  credit."  The 
goods  may  be  on  consignment,  or  mortgaged,  the  book  ac- 
counts large,  the  bank  account  empty,  the  merchant's  house 
mortgaged  to  the  limit,  his  garage  bill  unpaid,  his  tailor's 
bill  a  year  overdue;  and  unless  the  property  is  set  forth  in 
cold  figures,  no  man  living  can  judge  the  risk  advisedly. 
Moreover,  the  merchant  must  be  required  to  keep  books.  He 
must  know  what  comes  in;  what  goes  out;  if  he  gets  his 
pay,  and  from  whom;  what  his  profits  ought  to  be,  and 
what  they  are;  how  much  his  sales  are,  and  what  the  cost 
of  selling. 

The  average  merchant  guesses  at  his  selling  price.  The 
cost,  plus  the  freight,  plus  what  he  thinks  he  ought  to  get, 
means  his  selling  price,  regardless  of  other  conditions. 
Competition  often  sets  the  price,  and  the  merchant  paying 
high  rent  must  compete  with  the  one  paying  a  low  rent. 
Likewise  standardized  goods  must  be  sold  at  fixed  prices  ir- 
respective of  the  cost  of  handling.  A  drug  store  on  Sixth 
Avenue,  New  York,  can  afford  to  sell  a  proprietary  article 
cheaper  than  one  on  Fifth  Avenue.  It  may  do  more  busi- 
ness at  less  expense  and  can  afford  to  take  close  profits; 
while  the  other  has  high  rent  and  other  expenses  in  pro- 
portion. 

The  average  merchant  knows  nothing  about  his  turn  of 
stock.  He  is  satisfied  to  keep  it  up,  make  a  living,  pay  his 
bills,  but  cares  not  for  the  process  by  which  the  results  are 
achieved.  Increased  sales  do  not  always  mean  increased 
profits  unless  the  same  volume  can  be  handled  at  the  same 
cost. 

How  TO  FIGURE  THE  TURN-OVER 

While  the  final  net  profit  of  retail  dry  goods  stores  is 
small,  this  is  often  offset  by  a  large  volume  of  sales  as 
compared  with  the  average  amount  of  merchandise  on  hand 
throughout  the  year.  This  is  what  is  known  as  the  "turn- 
over," and  the  thing  all  merchants  are  striving  to  make  as 
high  as  possible.  A  high  turn-over  indicates  that  the  stock 
is  moving  well  and  that  good  judgment  is  being  used  in  buy* 
ing  and  selling,  while  a  low  turn-over  shows  the  stock  is  not 
selling  properly  and  that  obsolete  stock  may  be  accumu- 
lating. 


ESSENTIALS    IN    GRANTING    CREDIT  421 

The  amount  of  turn-over,  of  course,  varies  with  different 
departments  in  the  same  store  and  with  different  stores,  de- 
pending on  their  location  with  respect  to  the  source  of 
supply. 

Merchandise  subject  to  change  in  styles  is  turned  over 
much  more  often  than  staples.  For  example,  millinery  and 
ladies'  ready-to-wear  clothing  are  usually  turned  from  six  to 
ten  times  per  year,  while  carpets,  linens,  dress  goods,  etc., 
are  commonly  turned  only  two  or  three  times. 

The  correct  method  of  computing  the  turn-over  is  an  im- 
portant matter  and  is  often  improperly  determined  by  many 
merchants.  The  proper  way  to  do  this  is  to  divide  the  aver- 
age monthly  stock  at  retail  into  the  sales  at  retail  or,  what  is 
virtually  the  same  thing,  by  dividing  the  average  stock  at 
cost  into  the  sales  at  cost.  Some  merchants  incorrectly 
divide  the  stock  at  retail  as  taken  at  inventory  periods  into 
sales  at  retail  or,  what  is  worse,  divide  the  stock  at  cost  at 
inventory  periods  into  sales  at  retail.  This  latter  method 
would  give  a  turn-over  at  least  fifty  per  cent,  more  than  the 
real  turn-over.10 

The  following  on  the  subject  of  turn-over  is  well  worth 
quoting:11 

"My  judgment  of  the  great  importance  of  the  turn  of 
stock  and  the  lack  of  appreciation  by  the  merchant  is  such 
that  I  desire  to  make  my  point  as  impressive  as  possible  and 
I  will  give  you  a  few  illustrations.  Now,  you  who  are  not 
merchants  would  be  surprised  how  few  merchants  realize  the 
importance  of  this  turn  of  stock  and  it  is  so  simple  that  I 
know  you  will  agree  with  me  that  it  is  really  the  A  B  C  of 
business.  Take  an  illustration  which  I  have  sometimes  given 
to  the  college  boys : 

"A  young  man  had  $5,000  and  wanted  to  go  into  the 
men's  furnishing  business.  He  came  to  me  for  advice  and  I 
said:  'You  take  $2,500  of  that  $5,000  and  bury  it  in  the 
ground,  then  take  $2,500  and  buy  goods.'  Now,  it  is  very 
clear  that  the  $2,500  in  the  ground  is  inactive.  In  other 
words  that  $2,500  invested  in  goods  has  got  to  be  active 
for  both.  He  is  worth  $5,000,  $2,500  of  which  is  dead,  in- 

loErnst  &  Ernst,  official  auditors  and  systematize^,  the  National  Retail 
Dry  Goods  Association,  in  The  New  York  Times. 

"E.  M.  Skinner  of  Wilson  Bros.,  Chicago  before  Chicago  Chapter,  A.  I.  B. 
38 


122  THE   PRACTICAL  WORK   OF   A   BANK 

active,  does  not  move.  The  $2,500  of  active,  new,  salable 
goods  is  doing  the  work  for  the  $5,000. 

"Take  the  United  Cigar  Stores.  I  have  used  this  illus- 
tration a  great  many  times  and  I  have  not  as  yet  received 
any  letters  from  the  United  Cigar  Stores  putting  me  on  the 
payroll  and  I  never  talked  with  any  of  their  officials  to  know 
if  this  is  their  system. 

"I  have  been  in  the  habit  of  going  into  the  store  near  our 
establishment  and  buying  a  certain  cigar.  Well,  just  assume 
for  the  sake  of  argument  that  I  buy  twenty-five  of  this  cigar 
once  every  two  weeks.  That  would  be  twenty-six  boxes  of 
cigars  I  would  buy  of  this  store  every  year.  Now,  the  clerk 
always  brought  down  three  boxes  of  cigars  of  this  particular 
brand.  I  said  to  him  one  day:  'Is  this  your  entire  stock  of 
this  cigar?'  He  said:  'Yes,  sir.'  That  is  the  best  illustration 
I  can  give  you.  Here  is  one  store  that  sells  one  customer 
twenty-six  boxes  a  year.  In  other  words,  they  turn  the  stock 
of  that  one  cigar  over  eight  times  a  year.  Now,  you  know 
vvhat  that  means.  It  means  that  on  every  dollar  invested  in 
that  cigar  they  make  eight  profits,  because  they  turn  it  eight 
times.  As  I  say,  I  don't  know,  but  I  am  positive  this  is  their 
system.  The  sale  of  that  box  of  cigars  goes  down  on  a  sale- 
sheet  and  I  will  bet  you  that  their  sale-sheet  of  to-day  is 
their  order-sheet  of  to-morrow  morning,  and  when  that 
great  truck  comes  around  in  the  morning  they  bring  in  that 
box  of  cigars  and  it  is  put  in  there  with  the  other  two  re- 
maining." 

GRANTING  MERCANTILE  CREDIT 

In  the  granting  of  mercantile  credit,  all  the  elements 
that  enter  into  personal  credit  are  desirable  and  even  neces- 
sary. First,  we  must  have  an  honest  man.  He  must  have 
demonstrated  this  by  his  past  conduct.  Then  we  must  have 
an  able  man,  and  this  we  can  easily  determine  by  his  past 
and  present  performances.  He  must  have  demonstrated 
that  he  .can  run  a  business — for  mercantile  credit  is  granted 
to  run  business  and  not  to  furnish  a  home  or  keep  an  auto- 
mobile. We  can  tell  what  sort  of  trader  he  is  by  his  methods 
of  advertising,  credits  and  general  aspect  of  his  business.  A 
store  that  is  well  located,  well  arranged  and  neat,  stock  fresh 
and  well  selected,  employees  loyal,  well  paid  and  fairly  treat- 
ed, is  presumably  prosperous.  We  can  tell  his  credit  methods 


ESSENTIALS    IN    GRANTING    CREDIT  428 

by  his  accounts  receivable.  This  should  be  the  focal  point.  It 
matters  not  how  much  goods  he  sells,  if  he  doesn't  get  his 
pay,  of  what  avail?  Anyone  can  sell  goods — only  the  good 
business  man  can  get  the  money  for  them.  Too  liberal  credit 
is  conducive  to  large  sales  and  slow  pay.  Does  he  pay  his 
personal  debts  promptly?  Does  he  live  within  his  means  and 
does  he  always  take  Ms  discounts?  Does  he  borrow  at  the 
bank,  and  if  so,  how  much?  Does  he  bear  a  good  reputa- 
tion in  the  trade?  What  is  the  worth  of  the  concern?  How 
much  capital?  Assets  minus  liabilities  equal  proprietorship, 
and  unless  the  equation  shows  an  overplus  of  assets,  the 
business  is  insolvent,  and  unless  there  is  sufficient  capital 
success  cannot  follow.  Business  failures,  in  the  main,  are 
caused  by  lack  of  capital. 

WHY  MEN  FAIL 

The  causes  of  business  failures  have  been  analyzed  from 
time  to  time  by  the  mercantile  agencies,  and  the  reasons  are 
stated  in  percentages  as  follows: 

Per  cent. 

Lack  of  capital   29.7 

Incompetence    30.2 

Inexperience 4.6 

Bad   credits    2. 

Competition     1 .0 

Fraud    10.3 

Neglect  2. 

Personal   extravagance    .7 

Speculation    .8 

Other  causes    17.8 


A  private  investigation  of  the  causes  of  500  partial  or 
total  collection  losses  resulted  in  finding  the  causes  of  fail- 
ure to  be  similar,  as  follows: 

Per  cent. 

Lack  of  capital    29.5 

Incompetence    24. 

Bad    credits    4.4 

Heavy   expense    3. 

Poor  location   2.2 

Expansion    2. 

Fraud    4. 

Neglect  4. 

Extravagance    4.8 

Speculation    2.1 

Intemperance    2. 

Other  causes    11.60 


424  THE   PRACTICAL  WORK  OF   A  BANK 

THE  DEVELOPMENT  OF  THE  RETAIL  STORE12 

It  is  illuminating  and  instructive  to  look  back  for  a  mo- 
-ment  and  follow  the  development  of  the  retail  store  in  its 
relation  to  this  most  important  matter  of  retail  credit.  In 
the  early  days  of  our  retail  business  a  store  was  started  to 
supply  the  demand  of  the  community  for  certain  necessities 
of  the  people.  If  a  town  needed  a  store,  a  general  store  was 
started.  It  carried  everything  the  community  needed.  Later 
if  there  became  a  demand  for  a  more  complete  line  of  dry 
goods,  or  clothing,  a  separate  store  was  started  and  so  on 
along  the  line  of  specialization.  If  the  community  grew, 
more  stores  were  started  of  the  same  kind,  but  only  as  the 
demand  made  them  or  seemed  to  make  them  necessary. 
These  stores  catered  to  the  actual  needs  of  the  people. 

As  time  went  on  and  our  present-day  methods  of  intense 
living  came  into  existence,  no  longer  was  it  sufficient  to  sim- 
ply fill  the  demand,  but  a  demand  was  created,  and  then  that 
great  modern  force  known  as  advertising  came  into  exist- 
ence. It  became  the  duty  of  advertising  not  so  much  to  in- 
dicate why  we  should  use  this  or  that  necessity,  but  to  show 
us  why  this  or  that  was  a  necessity,  until  to-day  we  are  all, 
those  of  small  means  as  well  as  those  of  large  (and  unfortu- 
nately those  of  us  of  small  means  are  the  more  easily  per- 
suaded) just  as  sure  we  need  a  talking  machine  or  an  auto- 
mobile as  we  are  we  should  use  Ivory  Soap,  Old  Dutch 
Cleanser,  or  one  of  Heinz's  57  varieties,  and  so  it  goes  along 
the  line  of  merchandising,  even  as  the  advertising  expert  will 
tell  you,  first  attention,  then  a  desire  for  things  is  created. 

Now,  if  this  desire  was  created  only  among  those  who 
could  afford  the  article,  well  and  good,  but  like  the  rain,  it 
falls  upon  the  just  and  unjust,  and  those  who  cannot  af- 
ford become  even  more  intense  in  their  desire  than  their  more 
prosperous  brothers.  And  so  we  have  our  present-day  con- 
dition of  the  over-expansion  of  abuse  of  retail  credit  until  it 
has  in  reality  become  a  menace  not  only  to  the  merchant  and 
to  the  individual,  both  man  and  woman,  but  to  the  commu- 
nity itself.  What  would  happen  if  all  your  merchants  insist- 
ed upon  all  their  accommodation  credit  accounts  being  paid 
promptly  in  thirty  days? 


12E.  M.  Skinner,  of  Wilson  Bros.,  Chicago. 


ESSENTIALS    IN    GRANTING    CREDIT  425 

Another  of  our  modern  methods  is  the  competition  in 
credit  as  well  as  merchandise.  In  the  strife  for  business  it 
is  not  only  the  goods  and  the  price  but  the  willingness  to 
trust.  This  is  one  of  the  great  evils  of  present-day 
methods,  an  evil  that  like  other  evils  is  difficult  at  first,  easier 
afterwards,  until  later  on  we  become  unconscious  to  the  re- 
sult of  it.  And  it  has  seemed  to  me  that  with  the  man  who 
wants  to  "feather  our  nest  with  no  cash  down,"  the  piano 
dealer  who  will  sell  a  $150  piano  for  $250  and  take  $10 
down  and  monthly  payment  leads.  The  legitimate  retail  deal- 
er is  somewhat  to  blame  for  permitting  his  charge  accounts 
to  grow  until  they  consume  one-half,  two-thirds  or  perhaps 
all  of  his  capital  and  at  the  same  time  educate  the  man,  or 
more  particularly  the  woman,  to  go  in  debt  beyond  his  or  her 
means  or  immediate  ability  to  discharge.  Unless  your  capital 
is  sufficient  you  are  losing  your  discounts,  you  are  paying  in- 
terest, you  are  slow  in  meeting  your  obligations,  you  are 
allowing  your  credit  or  at  least,  your  methods  to  be  ques- 
tioned and  you  are  building  up  an  asset  of  so  questionable  a 
character  that  if  you  desired  to  sell  your  business  the  would- 
be  purchaser  would  not  take  it. 

PROFITS 

In  a  day  of  competition,  business  can  no  longer  be  done 
by  hit  or  miss  methods.  The  business  man  must  know  what 
his  goods  cost  to  manufacture;  what  to  market.  He  must 
know  details  from  a  scientific  standpoint.  It  no  longer  suf- 
fices to  know  what  his  rental  charge  is — he  must  know  how 
much  of  that  charge  belongs  in  a  certain  article.  The  prof- 
its of  to-day  are  made  from  the  wastes  of  yesterday.  And 
the  wastes  of  to-day  will  be  the  profits  of  to-morrow.  It  is 
one  thing  to  make  profit  from  waste  and  another  to  waste 
profits. 

A  perfectly  conducted  business  should  make  a  legitimate 
profit  on  every  dollar  of  merchandise  sold;  but  as  we  are 
all  human  and  must  make  mistakes,  as  the  public  is  fickle 
and  styles  change  all  too  quickly,  there  is  reason  for  a  sale 
at  the  end  of  a  season  of  odds  and  ends  of  merchandise  that 
the  merchant  has  not  been  able  to  properly  judge  as  to  its 
salability;  but  for  the  loss  of  profit  on  sales  before  the  end 
of  the  season,  for  the  selling  of  a  large  proportion  of  the 
season's  purchase  in  this  manner  is  commercial  suicide.  The 


126  THE   PRACTICAL   WORK  OF   A   BANK 

merchant  must  have  profit  or  he  cannot  succeed — he  cannot 
charge  an  exorbitant  profit  on  some  goods  to  make  up  his 
loss  of  profit  on  others — he  must  find  some  way  to  sell  the 
bulk  of  his  goods  profitably  or  he  will  surely  drop  by  the 
wayside  as  one  of  the  unfit.  We  cannot  do  business  solely 
on  "bargain  sales." 

Speaking  of  the  profits  that  attend  merchandising, 
Messrs.  Ernst  and  Ernst  say : 

"From  a  wide  experience  in  many  retail  dry  goods  and 
department  stores  we  have  accumulated  a  large  amount  of 
data  on  expense  of  operation.  It  would  not  be  satisfactory 
or  fair  to  attempt  to  compare  the  results  of  various  stores 
with  respect  to  the  individual  items  on  account  of  the  vary- 
ing conditions. 

"We  have,  therefore,  picked  twenty-five  stores  in  differ- 
ent cities  throughout  the  United  States  and  find  the  average 
per  cent,  of  gross  profits  (total  net  sales  less  cost  of  inven- 
tory value  of  goods  sold),  per  cent,  of  net  profit,  and  per 
cent,  of  overhead  expenses  to  net  sales  are  as  follows: 

Gross  Overhead  Net 

Profit.  Expenses.  Profit. 

P.  C.                   P.  C.  P.  C. 

Average  25   stores    30.42                    23.84  6.58 

Highest  single  store  35.10                   28.00  10.66 

Lowest  single  store    : 27.33                   18.02  3.50 

"From  the  above  it  will  be  seen  that  the  average  cost  of 
the  merchandise  was  69.58  per  cent,  of  the  net  sales,  and 
that  the  cost  of  doing  business  was  approximately  one-third 
of  the  original  cost  of  the  merchandise.  In  other  words, 
when  a  customer  buys  an  article  for  one  dollar,  sixty-nine 
cents  goes  to  pay  for  the  cost  of  it  and  twenty-three  cents 
pays  for  the  expense  of  the  merchant  in  supplying  him  with 
the  article. 

"The  modern  retail  dry  goods  store  of  to-day,  conducted 
along  the  right  lines,  has  its  business  divided  into  many  dif- 
ferent departments,  each  being  conducted  independently,  so 
to  speak,  from  the  others.  The  departments  are  little  stores 
in  themselves.  This  plan  is  followed  so  that  the  gross  and 
net  profit  or  loss  can  be  ascertained  as  to  each  department. 
The  merchandise,  when  purchased,  is  charged  to  the  depart- 
ment to  which  it  goes,  the  overhead  expenses  are  pro  rated 
over  the  various  departments,  and  likewise  the  sales  are  kept 


ESSENTIALS    IN    GRANTING    CREDIT  427 

separate.  This  is  the  only  method  by  which  a  merchant  can 
tell  whether  a  department  is  profitable  or  not.  The  percen- 
tages shown  above,  of  course,  refer  to  all  departments  taken 
as  a  whole. 

"It  must,  of  course,  be  understood  that  the  gross  profit 
finally  realized  is  usually  much  less  than  the  original  gross 
profit  at  which  the  merchandise  is  marked  up  to  sell.  The 
losses  on  account  of  markdowns,  special  low-price  sales,  loss 
of  merchandise,  stolen  goods,  etc.,  are  all  absorbed  in  the 
final  gross  profit  as  determined  for  the  year."1 

LOSSES 

The  losses  in  retail  credits  as  ascertained  by  an  investiga- 
tion of  1,000  stores  covering  various  lines  were  as  follows : 

Per  Cent, 
of  Net  Sales 

Furniture  1.94 

Groceries    .47 

Clothing    34 

Vehicles    33 

Hardware    .31 

Jewelry    .23 

Dry  goods  .21 

Department  stores    .19 

Drugs    18 

Shoes .11 

Variety  goods None 

The  secretary  of  the  Retail  Grocers  Association  of  Kan- 
sas City  figures  that  a  loss  of  one  per  cent,  of  sales  is  nor- 
mal for  an  $18,000  a  year  grocery. 

The  most  successful  methods  of  reducing  mercantile 
losses  used  by  286  merchants  are:  (1)  A  distinct  under- 
standing as  to  terms  and  limits  of  the  credit;  (2)  individual- 
izing customers — that  is,  knowing  the  man.  One  credit  man 
states  that  he  met  one  of  his  customers  for  the  first  time  at  a 
meeting  of  creditors;  but  if  he  had  met  him  sooner  there 
would  have  been  no  meeting  of  creditors;  (3)  cooperation 
with  trade  and  trade  bureaus;  (4)  monthly  collections  and 
good  collection  methods;  (5)  care  in  accepting  new  accounts. 

BUSINESS  RISKS 

Business  is  divided  into  four  main  groups:  Manufactur- 
ing, wholesaling,  jobbing  and  retailing.  The  risk  the  man- 


York  Timef,  April  13th.  1914. 


128  THE   PRACTICAL  WORK  OF   A   BANK 

ufacturer  runs  is  that  he  may  not  get  hack  the  cost  of  his 
material  plus  the  cost  of  manufacturing,  and,  therefore,  lose 
not  only  his  profit,  but  the  capital  invested  or  borrowed.  He 
must  have  a  good  cost  system  in  order  to  know  what  it  costs 
.to  produce  his  article.  Then  he  must  sell  it.  It  may  be  he 
manufactures  an  article  that  is  in  steady  and  wide  demand, 
and  the  profits,  while  they  may  be  small,  are  steady  and 
certain.  But  if  he  manufactures  an  article  subject  to  chang- 
ing fashions,  the  whims  of  the  season — novelties — a  change 
of  public  opinion  may  seriously  affect  his  business.  The 
manufacture  of  clothing,  especially  that  for  women,  which 
is  highly  a  matter  of  fashion,  is  precarious  when  the  styles 
are  radical  and  the  changes  come  suddenly  and  without 
warning.  The  weather,  the  seasons,  crops  and  so  many 
factors  enter  into  the  consideration  of  a  manufacturing 
credit  risk  that  it  is  perhaps  the  most  difficult  class  to  judge. 
Labor  strikes,  the  tariff,  loose  credit  methods,  depreciation 
of  plant  and  machinery,  and  improper  bookkeeping  methods, 
are  all  factors  to  be  considered  in  manufacturing  credit  risks. 

Manufacturing  may  be  divided  into  two  general  classes: 
The  manufacture  of  goods  for  consumption  and  the  manu- 
facture of  goods  for  production.  The  manufacture  of  con- 
sumptive goods  divides  itself  into  goods  for  necessities,  goods 
for  comfort  and  goods  for  luxuries.  The  first  class  would 
include  such  products  as  meat,  cereals,  canned  goods,  cloth- 
ing, etc. — in  fact  anything  to  eat  or  wear  that  is  not  dis- 
tinctly a  luxury.  Such  articles  as  perfumes  and  toilet  ac- 
cessories are  distinctly  luxuries  and  could  well  be  spared  to 
a  very  large  extent.  As  comforts  may  be  included  all  those 
things  useful  but  not  necessary,  which  add  to  the  conven- 
iences of  life. 

It  is  obvious  that  an  article  such  as  meat  will  have  a 
wide  and  constant  demand,  and  a  stock  of  such  could  be 
quickly  turned  into  money.  "Packing-house  paper,"  as  it  is 
called — meaning  the  commercial  paper  issued  by  the  great 
meat  houses — is  highly  regarded  everywhere.  Likewise 
groceries  of  staple  character  which  are,  like  meat,  in  con- 
stant and  widespread  demand.  Such  articles  as  canned 
goods  and  food  products  in  general  that  will  not  spoil,  cof- 
fee, rice,  etc.,  are  good  security  for  loans  from  a  realization 
standpoint;  but  perishable  articles,  such  as  butter  and  eggs, 
vegetables,  while  good  as  collateral  for  bill-of -lading  loans, 


ESSENTIALS    IN    GRANTING    CREDIT  429 

are  not  of  sufficient  durableness  to  make  them  good  for  a 
long-time  loan.  Wholesale  hardware  is  a  staple  article,  in 
constant  demand,  and  not  perishable,  and,  therefore,  well 
regarded.  Bankers  favor  print  cloths,  staple  fabrics,  wool- 
ens, white  goods  and  staple  lines  of  textiles.  Anything  that 
is  a  necessity  of  life  is  a  good  foundation  for  credit  and  any 
well-managed  concern  dealing  in  such  generally  a  good  risk. 
Production  goods  are  such  articles  as  are  necessary  in 
the  economic  development.  Such  would  be  electrical  goods, 
farm  machinery,  goods  used  in  construction  work,  and  those 
articles  which  are  used  to  promote  industry  and  efficiency. 
But  business  depressions  affect  all  lines  of  activity,  and  even 
though  the  article  be  in  the  class  of  productive  goods  that 
have  wide  and  steady  consumption,  depressions  will  natural- 
ly curtail  production  and  competition  will  cut  profits.  Thus, 
a  lull  in  building  will  have  its  effect  upon  electrical  goods, 
elevators  and  other  articles  entering  into  construction  work. 
Likewise  furniture,  while  a  necessity,  will  have  its  dull  sea- 
sons when  the  economies  of  the  people  cut  down  expendi- 
tures to  low  ebb,  for  a  large  part  of  house-furnishing  goods 
may  well  be  classed  as  luxuries. 

THE  WHOLESALE  AND  THE  RETAILER 

The  wholesaler  is  not  burdened  with  a  plant  to  maintain, 
machinery  to  wear  out,  a  class  of  labor  that  is  always  crying 
for  more  wages,  but  he  must  have  an  expensive  selling  or- 
ganization. The  wholesaler  can  buy  even  seasonable  and 
fashionable  goods  as  wanted,  and  need  not  stock  up  heavily. 
The  retailer  is  last  in  the  list.  More  and  more  business  is 
getting  down  to  a  cash  basis,  and  with  the  extension  of  the 
department  store  idea,  and  the  advantages  of  cash  dealings 
growing  in  popular  favor,  the  retailer  as  a  credit  risk  is  com- 
ing to  be  better  understood.  Moreover,  his  assets  are  largely 
quick  assets — merchandise  and  accounts  receivable. 

In  the  chain  of  merchandising  the  greatest  risk  is  taken  by 
the  manufacturer.  Some  credit  men  eliminate  the  manufac- 
turer and  loan  to  him,  if  at  all,  only  when  they  have  gone 
carefully  into  his  affairs  and  become  satisfied  of  his  stand- 
ing. One  New  York  bank  is  said  to  have  an  officer  who 
spends  most  of  his  time  going  around  among  manufacturers 


430  THE    PRACTICAL  WORK  OF   A   BANK 

and  inspecting  their  plants.    Photographs  are  taken  and  the 
affairs  given  most  careful  study. 

STANDARDS 

Banking  credit  standards  are  of  the  highest,  and  the  test 
put  by  the  banker  is  more  severe  than  by  the  merchant.  The 
latter  wants  trade;  he  does  not  want  to  lose  a  customer;  his 
profits  are  larger  than  bank  profits,  and  he  can  afford  to 
assume  risks;  first,  because  it  is  his  own  money,  and  second, 
for  the  profit  that  eventually  attends.  Moreover,  the  mer- 
chant-creditor may  extend  the  credit  while  the  banker- 
creditor  cannot. 

When  the  book  account  is  due  it  may  be  extended,  or 
allowed  to  run  until  by  the  slow  process  of  the  law  it  is  col- 
lected ;  but  the  bank  cannot  extend  its  debts.  They  are  pay- 
able on  demand,  and  it  cannot  settle  one  debt  by  incurring 
another  as  does  the  merchant,  but  it  must  pay  or  suspend. 
Under  the  Federal  Reserve  Act,  banks  will  now  be  able  to 
turn  good  mercantile  credits  into  bank-note  credits,  and  as 
long  as  they  keep  their  paper  in  conformity  with  the  rulings 
of  the  Federal  Reserve  Board,  can  depend  upon  being  able 
to  quickly  turn  good  assets  into  circulating  credits. 

THE  CREDIT  DEPARTMENT 

The  division  of  credit  which  will  particularly  engage  our 
attention,  however,  is  that  of  bank  credit.  A  bank  has  been 
likened  to  the  human  body,  with  the  executive  force  as  its 
head,  the  tellers  its  hands,  the  runners  its  legs,  and  further 
likenesses  which  imagination  will  readily  supply.  The  life 
blood  of  this  body  is  its  loans  and  investments,  and  the  credit 
department  is  analogous  to  the  lungs  and  heart  which  keep 
the  loans  pure,  liquid  and  circulating.  To  properly  perform 
these  functions,  the  credit  department  must  be  properly 
equipped  and  properly  directed. 

In  the  early  days  of  American  banking,  loans  were 
largely  local.  The  cashier  was  chosen  for  his  knowledge  of 
local  conditions.  The  bank  made  its  loans  with  the  expecta- 
tion that  they  would  run  for  a  long  time,  and  were  often  se- 
cured by  real  estate  mortgages,  and  were  in  the  nature  of 
borrowed  capital  rather  than  working  capital.  The  home 


ESSENTIALS    IN    GRANTING    CREDIT  481 

demand  absorbed  the  loanable  funds  and  a  bank  rarely 
thought  of  going  outside  its  immediate  field  for  investment. 
But  with  the  development  of  the  country  and  the  concentra- 
tion of  wealth,  and  the  growth  of  banking  resources,  wider 
fields  had  to  be  found  both  for  the  borrower  and  the  lender, 
resulting  in  the  credit  department  and  the  commercial  paper 
broker — the  one  to  buy  and  sell  the  paper  and  the  other  to 
pass  upon  its  quality. 

Thirty  years  ago,  the  credit  department  was  unknown, 
but  to-day  it  is  part  of  the  organization  of  every  well-man- 
aged bank,  with  its  officer  in  charge,  files  and  elaborate  in- 
formation concerning  not  only  its  borrowers,  but  large  con- 
cerns all  over  the  country.  The  machinery  of  the  credit  de- 
partment depends  upon  the  size  of  the  bank  and  the  scope 
of  its  activities,  the  country  bank  needing  less  elaborate  ma- 
chinery than  the  city  bank  which  furnishes  information  to  its 
thousands  of  correspondents. 

THE  BANK  AND  ITS  CORRESPONDENTS 

Elsewhere  it  has  been  stated  that  the  competition  among 
the  large  banks  for  out-of-town  accounts  is  keen.  It  is— 
extremely  so.  Most  of  the  large  banks  have  men  who  do 
nothing  but  follow  up  prospects  and  keep  in  touch  with  cus- 
tomers. If  a  new  bank  is  proposed,  as  soon  as  the  fact  be- 
comes known — and  sometimes  before  it  becomes  public 
property — the  machinery  will  begin  to  move  to  get  that 
account. 

The  bank  will  have  its  representative  busy  himself  imme- 
diately, and  he  will  offer  to  see  the  bank  through  its  organ- 
ization period,  help  it  select  its  books  of  accounts,  attend  to 
its  affairs  in  Washington,  if  it  be  a  national  bank,  get  it  a 
cashier,  and  altogether  be  a  "big  brother"  to  it  until  it  can 
walk  alone.  And  where  banks  are  organized  every  day  by 
men  who  have  no  banking  knowledge  it  becomes  needful  that 
some  guiding  hand  be  at  the  helm  to  steer  the  new  ship  safe- 
ly. Herein  the  big  bank  comes  into  its  own.  It  knows  just 
what  to  do  to  get  the  charter,  to  buy  the  bonds,  lodge  them 
for  security,  make  the  records,  open  the  books,  lay  out  the 
banking  room,  and  in  a  thousand  different  little  ways  comes 
to  the  rescue  of  "the  bank  that  would  be."  It  may  be  friend- 
ship that  gets  the  account,  but  more  often  it  is  service.  And 


*82  THE   PRACTICAL  WORK   OF   A   BANK 

this  service  is  real,  helpful  and  to  the  point,  at  the  time  when 
it  is  most  needed. 

The  city  bank  not  only  assists  in  the  organization  of  the 
country  bank,  makes  loans15  and  keeps  securities  for  it,  but 
the  principal  sendee  to  its  correspondents  is  the  furnishing 
of  credit  information.  It  places  its  credit  files  at  the  com- 
mand of  its  clients  freely.  It  will  recommend  paper,  buy  it, 
and  attend  to  its  collection,  all  gratis,  as  part  of  the  service 
rendered  in  return  for  the  account.  It,  therefore,  becomes 
necessary  to  have  extensive  credit  facilities  if  it  would  give 
good  service,  and  this  it  does. 

CREDIT  INFORMATION 

The  credit  department  is  a  bureau  of  information.  It 
gathers  information,  classifies  it  and  presents  it  when  needed. 
It  does  not,  as  a  department,  as  a  rule,  pass  upon  the  loans, 
but  furnishes  the  credit  information  that  is  essential  to  the 
granting  of  credit.  The  methods  and  the  machinery  may 
differ  slightly  in  different  banks,  but  the  principles  and  the 
modus  operandi  are  the  same  in  substance.  The  information 
is  generally  kept  in  envelopes  or  folders,  all  data  concerning 
one  individual  or  corporation  being  filed  together. 

The  information  that  finds  lodgment  in  the  credit  de- 
partment consists  of:  (a)  The  information  furnished  by  the 
borrower,  both  direct  and  indirect ;  his  statement  of  condition, 
preferably  for  a  series  of  years,  and  other  information  con- 
cerning him  that  the  credit  department  may  obtain  through 
conversations  with  him  and  reports  concerning  him. 

(b)  Information  gained  through  the  "trade,"  meaning 
the  business  concerns  with  which  the  party  does  business. 
This  includes  the  promptness  with  which  he  meets  his  bills; 
whether  he  takes  his  discounts,  and  his  general  reputation  as 
a  credit  risk,  from  a  mercantile  standpoint. 

(c)  Information  gained  from  banks  that  have  dealt 
with  the  concern,  and  especially  in  the  line  of  loans  and 
discounts,  and  as  a  depositor. 

(d)  Mercantile  reports  from  the  great  reporting  agen- 
cies, Dun  and  Bradstreet's. 

(e)  Miscellaneous  information  gleaned  from  various 

"Loaning  the  Bank's  Money,"  page  242. 


ESSENTIALS    IN    GRANTING    CREDIT  488 

sources,  such  as  newspaper  reports  of  judgments,  assign- 
ments, bankruptcies  and  other  published  information  that 
affects  the  credit  standing  of  the  party. 

A  record  of  the  past  performances  of  the  borrower,  his 
habits,  his  associations,  his  business  record,  is  important;  also 
a  record  of  his  average  balances,16  his  average  borrowings; 
his  promptness  in  paying;  whether  or  not  his  paper  has  gone 
to  protest;  how  much  credit  has  been  asked  for  and  how 
much  granted.  If  he  issues  paper  on  the  market,  this  will 
be  known,  through  whom,  in  what  amounts,  and  how  it  is 
regarded  in  the  banks  handling  it. 

To  get  information  as  to  his  balances  and  borrowings  on 
cards  the  method  in  use  in  some  banks  is  to  fix  some  date  in 
the  month  when  the  work  of  the  bookkeepers  is  liable  to  be 
the  lightest,  and  have  the  credit  department  on  this  day  send 
the  cards  to  them.  As  soon  as  the  information  is  filled  in,  the 
cards  are  returned  to  the  credit  department.  In  some  of  the 
larp-e  banks  in  New  York  where  balance  ledgers  are  kept,  it 
is  the  custom  for  a  man  from  the  credit  department  each 
month  to  place  the  information  on  the  cards,  getting  the 
average  balances  from  the  balance  ledgers,  the  discounts 
from  the  discount  department  and  the  loans  from  the  loan 
department.  One  card  when  completely  filled  will  contain 
the  monthly  and  yearly  average  balances  for  ten  years  on  one 
side,  and  on  the  front  the  maximum  and  minimum  loans  and 
discounts  and  information  for  about  ten  years. 

HOTV  CREDIT  INFORMATION  is  KEPT 

Credit  information  is  best  kept  in  manilla  folders  such  as 
used  in  filing  letters,  these  being  numbered,  with  the  name 
on  the  outside.  A  digest  of  the  statement  is  generally  made 
on  a  form  provided  for  that  purpose,  for  the  sake  of  uni- 
formity and  ready  reference.  This  gives  only  the  main  facts 
in  round  figures.  This  appears  first,  the  other  information 

io"Most  modern  banking  institutions,  especially  in  the  well  settled  sections 
of  the  Atlantic  seaboard,  have  adopted  a  ratio  of  balances  to  loans  which  they 
expect  the  borrower  to  maintain.  It  is  ordinarily  as  one  is  to  five.  This  pro- 
portion was  fixed  in  the  same  manner  as  the  25  per  cent,  reserve  which  banks 
were  expected  to  maintain.  Both  percentages  are  based  on  the  experience  of 
credit  grantors  which  has  proven  that  one  dollar  in  cash  will  support  a  credit 
structure  of  from  five  to  eight  dollars.  The  maintenance  of  these  balances  is, 
in  a  measure,  a  check  against  over  extension  of  credits,  and  provides  a  reserve 
against  liability  for  the  customer." 


t34  THE   PRACTICAL   WORK  OF   A   BANK 

following  in  uniform  order.  The  folders  are  indexed  as  to 
names  in  a  separate  drawer.  But  if  the  volume  of  credit 
names  is  not  large  the  folders  might  be  filed  alphabetically. 
Inasmuch  as  credit  information  is  cumulative,  and  becomes 
more  complete  and,  therefore,  the  more  valuable,  it  is  need- 
less to  add  that  the  information  should  be  safe  from  fire. 
The  credit  files  might  be  classified  into  "Own  customers," 
"Paper  offered  in  the  market"  (names  being  obtained  as  of- 
ferings come  in),  and  "Others,"  such  as  prospects,  large 
firms  in  the  locality,  etc.  And  if  a  bank  discounts  as  a 
steady  proposition  for  certain  correspondents,  it  will  have  a 
file  for  such  firms  as  it  will  accept  for  rediscount. 

The  Federal  Reserve  Bank  proposes  to  have  a  central 
bureau  of  credit  information,  to  assemble  information  con- 
cerning all  large  borrowers  whose  paper  is  offered  for  re- 
discount. 

CLASSIFICATION  OF  RISKS 

Credit  department  work  bears  endless  classification 
and  sub-classification,  and  extensive  data  can  be  obtained 
for  the  guidance  of  the  officers,  by  classifying  the  paper 
held.  The  different  lines  of  industry  that  are  included  in 
the  bank's  borrowings  may  be  given  a  page  or  section  in  a 
loose  leaf  ledger,  and  the  paper  of  the  different  firms  com- 
ing under  that  classification  listed  as  to  amount  bought, 
amount  paid  and  balance  for  each  month,  the  total  being  the 
amount  outstanding  against  that  particular  line  at  any  one 
time.  A  classification  may  also  be  made  of  paper  held  in 
various  sections  of  the  country  so  as  to  scatter  the  risks 
geographically. 

It  is  also  suggested  that  banks  keep  a  record  of  the  in- 
quiries coming  in  as  a  guide  for  future  information.  For 
instance,  a  bank  answers  an  inquiry  along  certain  lines,  and 
if  this  inquiry  is  listed  on  a  card,  it  would  be  a  clue  for  an- 
swering similar  inquiries  in  the  future. 

Some  banks  run  a  statement  tickler,  to  keep  track  of 
when  statements  are  made  by  firms,  or  when  audits  are  due, 
and  thus  keep  their  statements  up  to  date ;  but  the  same  pur- 
pose can  be  accomplished  by  running  through  the  statements 
on  file  and  bringing  down  to  date  any  showing  a  year's  age. 


ESSENTIALS  IN  GRANTING  CREDIT  435 

THE  CREDIT  MAN 

The  man  who  presides  over  this  particular  branch  of  the 
banking  business  must  have  many  and  varied  qualifications. 
He  must  know  men ;  he  must  know  business.  He  must  have 
a  wide  knowledge  of  how  business  is  done,  the  terms  of  credit 
and  the  trade  secrets.  He  should  be  analytic.  He  should 
understand  accounting.  He  should  know  the  law.  He 
must  be  an  observer,  both  of  men  and  events.  He  must  be 
systematic  and  conservative.  He  cannot  afford  to  be  reck- 
less. 

Probably  the  first  essential  is  a  healthy  curiosity,  which 
leads  him  to  inquire  into  and  ascertain  the  reason  for  condi- 
tions which  only  serve  to  excite  the  passing  comment  of  the 
ordinary  observer.  To  this  must  be  added  something  of  the 
traits  of  a  Sherlock  Holmes — well-trained  observation,  de- 
ductive skill  and  the  ability  to  draw  accurate  conclusions. 
There  is  undoubtedly  an  intuition  developed  by  the  credit 
man  which  is  sometimes  called  "credit  sense."  Some  fortu- 
nate ones  may  be  born  with  this  invaluable  aid,  but  it  comes 
to  the  ordinary  student  only  by  the  consideration  of  count- 
less cases  and  by  arriving  at  conclusions  through  painstaking 
analysis. 

The  credit  officer  is  brought  into  direct  contact  with  the 
executives;  his  work  is  under  their  eye  and  gains  immedi- 
ate recognition.  He  not  onlv  meets  men,  but  learns  business 
as  a  broad  science,  and  in  a  few  years  has  a  large  fund  of 
valuable  information.  While  his  work  may  be  pressing,  it 
is  varied,  so  that  the  grind  that  obtains  in  many  departments 
of  the  bank's  work  is  not  manifest  here. 

On  one  of  the  clay  tablets  of  the  Babylonian  period,  re- 
cording the  business  transactions  of  the  time,  there  is  an  in- 
scription to  the  effect  that  "In  the  month  of  Ab  of  the  first 
year  of  Neriglissar,  King  of  Babylon,  I  (Belilit1^  sold  Ba- 
zuzu,  my  slave,  for  half  a  mana,  five  shekels  of  money,  to 
Nabu-akhi-iddin,  son  of  Shula,  son  of  Egibi.  I  took  his 
note,  but  he  has  not  paid  the  money,"  showing  that  even  in 
those  days  bad  credit  risks  were  in  existence  and  good  credit 
men  necessary. 


486  THE    PRACTICAL   WORK   OF    A    BANK 

LOSSES  EXPECTED 

In  mercantile  transactions  each  sale  carries  a  profit,  and 
if  the  losses  are  kept  within  bounds  (one-quarter  to  one-third 
of  one  per  cent,  of  the  sales)  the  merchant  is  satisfied.  He 
must  take  risks  in  order  to  make  profits;  and  if  he  accepts 
only  those  orders  which  will  surely  be  paid  promptly  and 
without  effort,  he  will  lose  much  valuable  trade.  He  ex- 
pects losses,  provides  for  them  and  accepts  them  as  inci- 
dental to  the  business.  The  banker  does  not  expect  losses; 
he  does  not  arrange  his  prices  with  losses  in  view,  and  en- 
deavors to  avoid  them  entirely.  Moreover,  the  merchant  is 
dealing  in  goods  to  which  he  has  title  and  the  losses  are  large- 
ly his  own  losses ;  whereas  the  banker  is  lending  money  which 
belongs  to  other  people,  and  which  he  has  obligated  himself 
to  pay  on  demand. 

THE  ESSENTIALS  OF  A  GOOD  LOAN 

Good  credit  is  the  bedrock  of  business  success;  poor 
credit  is  the  quicksand  of  disaster.  As  a  general  statement, 
that  credit  is  good  which  is  based  upon  an  exchange  of  com- 
modities. The  only  exceptions  are  those  loans  which  are  in 
the  nature  of  an  accommodation,  and  yet  have  behind  them 
the  strength  and  financial  soundness  of  one  whose  name  and 
credit  standing  are  sufficient  to  offset  the  lack  of  an  ex- 
change in  values. 

It  is  no  function  of  a  bank  to  furnish  its  patrons  with 
permanent  working  capital,  and  good  banking  credit  is  based 
upon  loans  made  after  due  consideration  of  the  borrower  and 
his  standing,  and  supported  by  collateral,  whether  pledged 
or  not,  that  is  subject  to  prompt  and  full  liquidation.  An 
authority  on  banking  states  that  a  well-managed  bank  should 
have  twenty  per  cent,  of  its  investments  in  high-grade  secu- 
rities; twenty  per  cent,  in  commercial  paper  which  it  is  under 
no  obligation  to  renew,  and  purchased  in  the  open  market; 
and  sixty  per  cent,  in  loans  to  its  customers. 

The  bank  must  meet  its  obligations  as  the  merchant 
meets  his — by  the  maturity  of  its  credits ;  and  the  credit  that 
does  not  promptly  redeem  itself  is  unsound.  The  greatest 
measure  of  safety  in  the  credit  system  lies  in  the  fact  that 
no  great  part  of  the  outstanding  obligations  will  have  to  be 


ESSENTIALS    IN    GRANTING    CREDIT  487 

met  at  any  one  time.  Experience  has  proven  this  beyond 
peradventure,  and  when  a  quick  demand  for  unusual  re- 
demption occurs,  panic  results  and  the  credit  system  col- 
lapses. It  is  needless  to  add  that  good  credit  does  not  con- 
sist in  the  banker  lending  to  himself.  He  cannot  be  a  judge 
of  his  own  affairs.  The  Comptroller  of  the  Currency  has 
digested  the  causes  of  failure  of  418  banks,  and  finds  that 
214  were  caused  by  excessive  loans  to  officers  and  directors, 
fraudulent  management  and  embezzlement. 

ELEMENTS  OF  SOUND  CREDIT 

By  weight  of  authority,  it  is  conceded  that  in  granting 
credit  three  elements  must  be  considered,  namely: 

(a)  Character  (b)  Capacity  (c)  Capital 

(a)  Reliability  (b)  Capability  (c)  Resources 

(a)  The  man  (b)  The  methods  (c)  The  means 

(a)  The  moral  risk  (b)  The  business  risk  (c)  The  property   risk 

r^Sfe* 

Every  application  for  credit  does  not  possess  all  three, 
nor  does  it  need  to.  But  good  credit,  however,  depends 
upon  the  degree  in  which  these  elements  enter  into  the  risk. 
The  man  with  character,  but  no  ability  or  capital,  is  doomed 
to  failure.  He  has  neither  funds  of  his  own  nor  the  ability 
to  safely  use  the  funds  of  others.  Good  intentions  never 
pay  bills.  He  who  has  ability  but  no  character  is  a  bad 
risk — he  may  use  his  ability  to  defraud.  Lack  of  ability  and 
capital  accounts  for  three-fifths  of  the  business  failures.  The 
business  that  "turns  over"  frequently  can  run  with  less  cap- 
ital than  that  which  must  be  done  on  long  credit.  But  even 
though  his  capital  be  small,  the  man  with  character  and 
ability  will  be  a  safe  risk.  The  ideal  risk,  however,  is  ade- 
quate capital,  unimpeachable  character  and  sound  business 
methods. 

THE  MAN — THE  MORAL  RISK 

Character  means  more  than  mere  honesty.  It  means 
habits,  companionships,  past  record,  antecedents.  Business 
character  is  business  reputation,  built  up  by  long  years  of 
fair  dealing.  The  man  who  claims  to  be  honest  must  prove 
his  claim  by  squaring  himself  with  the  world  and  keeping 
himself  so.  In  the  cooperative  credit  banks  of  Europe, 

29 


138  THE   PRACTICAL  WORK  OF   A   BANK 

which  have  been  eminently  successful  in  the  granting  of 
credit,  character  is  made  the  basis  of  all  loans,  and  the  losses 
have  been  remarkably  few.  While  credit  deals  less  with 
men  than  with  things,  the  man  must  be  analyzed  as  well  as 
his  possessions,  for  the  statement,  being  a  matter  of  honor 
(unless  made  by  an  independent  audit)  must  be  character- 
ized by  good  faith  or  it  is  worthless. 

His  METHODS — THE  BUSINESS  RISK 

It  is  not  enough  that  a  man  be  good — he  must  be  good 
for  something.  We  test  his  ability  by  the  manner  in  which 
he  conducts  his  business,  and  by  the  character  of  that  busi- 
ness. Is  it,  first  of  all,  a  legitimate  business  and  sound;  or 
illegitimate  and  full  or  risk?  Is  it  stable,  or  subject  to  sud- 
den fluctuations — one  that  the  whims  of  fashion  may  jeop- 
ardize overnight?  Has  the  owner  demonstrated  his  ability 
to  manage  a  business;  does  he  manage  this  one  well?  Has 
he  built  it  up  himself,  or  did  he  inherit  it?>  Is  he  experi- 
enced or  is  he  a  novice?  (Experience  must  precede  the  em- 
ployment of  capital,  else  the  latter  may  be  lost  while  the 
former  is  being  acquired.)  Is  it  well  stocked  and  well  lo- 
cated? Are  the  profits  ample,  and  are  the  expenses  reason- 
able? Does  he  grant  credit  with  care,  or  indiscriminately? 
Does  he  over-buy,  over-trade,  over- trust?  Is  he  prompt  in 
his  collections  and  prompt  in  his  payments? 

His  RESOURCES — THE  PROPERTY  RISK 

Behind  every  good  loan  there  must  ultimately  be  prop- 
erty, tangible  and  convertible  into  money  without  great  cost 
and  undue  delay.  It  is  not  enough  that  there  be  stock — it 
must  be  salable  and  seasonable,  and  of  such  nature  as  to 
help,  not  hinder,  the  business.  The  kind  is  as  essential  as 
the  degree.  It  is  not  enough  that  there  be  book  accounts— 
they  must  be  collectible.  Many  a  man  has  failed  with  a 
fortune  on  his  books.  A  large  business  does  not  necessarily 
mean  a  safe  business — its  very  largeness  may  carry  it  to  de- 
struction. Is  the  capital  borrowed  or  inherited,  and  if  so 
are  there  any  "strings"  to  it?  Is  the  capital  ample?  Will 
the  lack  of  money  make  over-borrowing  necessary,  and  bur- 
den the  business  with  too  heavy  interest  charges?  It  takes 


ESSENTIALS    IN    GRANTING    CREDIT  489 

money  to  do  business,  and  while  a  large  amount  of  ready 
cash  need  not,  and  should  not,  be  idle  in  the  bank,  it  should 
be  quickly  available  by  the  maturity  of  obligations  to  meet 
current  demands. 

THE  STATEMENT — THE  BORROWER'S  ESTIMATE  OF  HIMSELF 

Modern  credit  is  based  upon  statements  prepared  with 
the  end  in  view  of  showing  the  true  condition  of  the  busi- 
ness at  a  stated  time.  Unless  made  by  an  independent  audi- 
tor who  has  no  interest,  aside  from  accuracy,  it  resolves  it- 
self into  a  man's  estimate  of  himself.  Its  purpose  is:  To 
reduce  losses;  to  minimize  risks;  to  assist  the  worthy;  to 
eliminate  the  unworthy. 

The  statement  consists  of  two  parts:  (a)  Assets  (from 
the  French  "Assez"  meaning  "enough"),  and  (b),  the  Lia- 
bilities. After  making  due  allowance  for  the  shrinkage  in- 
evitable in  all  business,  the  assets  must  equal  or  exceed  the 
liabilities  or  a  state  of  insolvency  exists. 

The  assets  readily  divide  themselves  into  (1)  Liquid  or 
quick  assets,  such  as  cash  on  hand  and  in  bank,  securities, 
collectible  book  accounts,  bills  receivable,  marketable  mer- 
chandise, and  any  other  resources  that  may  be  turned  into 
money  or  used  as  security.  (2)  Fixed,  or  non-liquid  as- 
sets, such  as  real  estate,  furniture  and  fixtures,  machinery, 
horses  and  trucks,  etc. 

The  question,  therefore,  to  be  decided  in  analyzing  every 
statement  is  this:  Is  there  enough?  Not,  will  this  man  pay 
his  obligations;  but  can  he  meet  them  as  they  fall  due?  Not, 
has  he  made  money  in  the  past ;  but  will  he  continue  to  make 
money  in  the  future?  Is  this  a  "going"  concern  and  likely 
to  continue  so? 

No  two  statements  are  alike  and  no  general  rule  will 
apply  to  all;  each  application  must  be  judged  by  itself.  It 
is  needless  to  say,  however,  that  in  granting  credit,  neither 
friendship,  religion,  politics,  social  or  family  ties,  or  senti- 
ment, should  play  any  part — simply  the  cold,  critical,  analy- 
tical judgment  that  comes  from  experience,  observation  and 
study. 

The  weakness  of  the  statement  lies  In  the  fact  that  the 
borrower  is  tempted  to  unduly  appreciate  his  assets  and  de* 
preciate  his  liabilities.  And  it  is  the  credit  man's  particular 


THE    PRACTICAL   WORK   OF   A   BANK 

business  to  see  that  the  assets  are  not  unduly  magnified. 
Current  liabilities  cannot  be  met  from  fixed  investments 
such  as  real  estate  and  machinery,  and  the  burden  of  carry- 
ing the  business  falls  upon  the  liquid  assets,  leaving  it  to  the 
fixed  assets  to  add  strength  and  stability  to  the  structure- 
backbone,  as  it  were.  Some  credit  men  are  of  the  opinion 
that  the  fixed  assets  should  be  eliminated  from  consideration 
entirely,  while  others  hold  that  they  should  be  scaled  at  least 
fifty  per  cent,  from  the  borrower's  figures,  and  then  re- 
garded as  security  only.  But  however  this  may  be,  if  the 
fixed  assets  bear  a  large  proportion  to  the  liquid,  they  are 
an  element  of  danger  and  tend  to  weakness;  if  small,  they 
tend  to  strength. 

Just  the  proper  proportion  of  capital  to  volume  of  busi- 
ness; whether  or  not  the  business  "turns  over"  promptly  and 
profitably;  whether  accounts  receivable  are  too  large  or  too 
slow  in  maturing,  can  only  be  learned  by  experience.  To 
correctly  judge  these  elements  in  the  granting  of  credit  is 
to  be  a  good  credit  man.  And  in  passing  upon  credits,  it 
must  be  realized  that  it  is  the  business  of  the  bank  to  loan 
money,  and  the  credit  that  is  refused  because  the  applica- 
tion has  been  incorrectly  analyzed  has  worked  an  injustice 
to  the  bank  and  perhaps  an  injury  to  the  borrower.  Profits 
arise  solely  from  sound  credits;  losses  from  the  unsound. 
The  credit  man  must,  therefore,  play  a  double  role:  for  the 
sake  of  his  bank,  and  for  the  sake  of  the  borrower,  he  must 
accept  the  good;  and  for  the  sake  of  his  bank,  irrespective 
of  the  borrower,  he  must  reject  the  bad,  and  only  training 
and  experience  can  teach  him  to  distinguish  the  one  from 
the  other.17 

STANDARDIZED  FORMS  OF  CREDIT  STATEMENT 

Credit  was  formerly  based  upon  the  knowledge  possessed 
by  the  bank,  either  through  its  cashier,  its  loan  committee 
or  directors,  of  the  borrower's  affairs.  His  balance  at  the 
bank  was  known  only  in  a  general  way  and  his  trade  con- 
nections and  standing  only  by  whether  or  not  he  had  drafts 
made  upon  him  by  his  creditors. 

Statements  of  condition  are  a  development  of  the  past 

""Essentials  in  Granting  Credit,"  ante  p.  372. 


ESSENTIALS  IN  GRANTING  CREDIT 


440a 


Federal  Reserve  Bank  of  New  York  Statement  Form 
INDIVIDUAL 


STATEMENT  OF 

BUSINESS ADDRESS. 


MERCHANT,  MANUFACTURER,  ETC. 


To BANE  OP 

I  make  the  following  statement-of  all  my  assets  and  liabilities  at  the  close  of  business  on and  give  other 

material  information  for  the  purpose  of  obtaining  advances  on  notes  and  bills  bearing  my  signature  or  indorsement,  and  for  obtaining  credit 
generally  upon  present  and  future  applications. 

CFLCASC  ANSWER  ALL  QUESTIONS  AND  FILL  IN  ALL  BLANKS) 


ASSETS 


LIABILITIES 


Cash  on  Hand  and  in  Bank,    

Accounts  Receivable 

Notes  Receivable 

Merchandise 

Other  Quick  Assets  (Itemize) 


Accounts  Payable . 


Notes  Payable  to  Banks , 

Notes  Payable  to  Others 

Other  Current  Liabilities  (Itemize) . 


Quick  Auet> 
Land  and  Buildings  (See  schedule  on  back).. . 

Machinery  and  Fixtures 

Other  Assets  (Itemize) 


Current  Liabilities 

Mortgages 

Other  Liabilities  (Itemize) 


Current  and  Deferred  Liabilities 

Net  Worth... 


Merchandise.    On  what  basis  valued,  cost  or  market? 

Finished  $ Unfinished* 

Raw  $ If  any  goods  on  consignment,  state 

amount  and  circumstances 


Do  you  take  advantage  of  all  trade  discounts? 

Sales  and  Profits  Last  Fiscal  Year.     Net  sales  $ 

Net  profits  $ 

Accounts  and  Notea  Receivable.    If  any  are  past  due  or  doubtful, 
state  amount  and  circumstances 


Contingent  Liability.    As  indorser   $ As  guarantor 

$ No  accounts  have  been  sold  or  assigned  ex- 
cept as  follows: 


Accounts  and  Notes  Payable.      If  any  are  past  due  state  amount 
and   circumstances 


Current  Liabilities.     During  last  fiscal  year,  current  liabilities  were 

at  a  maximum  ($ )  on 

and  at  a  minimum  (S )  on 


Mortgages  and  Other  Liens.    State  due  date  of  mortgages  and  on 
what  assets  a  lien 


If  any   are  due  from    employees,    relatives  or   similar   sources,    arc 
included  in  assets,  state  amount  and  circumstances 


Is  mortgage  a  lien  on  any  current  assets'  . . 

ither  liens  on  assets,  state  amount  and  circumstances. 


Bonds  and  Stocks.    State  general  character  and  if  readily  salable  at 


values  stated : 

Insurance.     Fire,  on  Buildings  t Merchandise  f 

Life  t Who.  is  .beneficiary? 


Afte.     My  Age  is Date  started  present  business 

Audits.    Are  books  audited  by  a  certified  public  accountant? . 
Give  date  of  last  audit 


I  hereby  certify  that  the  foregoing  figures  are  taken  from  my  books  and  that  they  and  the  statements  contained  on  both  sides  of  this  sheet  are 
true  and  give  a  correct  showidg  of  my  financial  condition. 

Signed  this day  of 191 Name •• 

..  Proprietor 

(OVER) 


CREDIT    STATEMENT — INDIVIDUALS    USED    BY   FEDERAL   RESERVE    BANK,    NBW    YORK 


THE  PRACTICAL  WORK  OF  A  BANK 


Federal  Reserve  Hank  of  New  York,  Statement  Form 
FIRM 


To                                                                         ' 

We  make  the  following  statement.of  all  the  assets  and  liabilities  of 
and  give  other  material  information  for  the  pur  MX  of  obtaining  adv 
obtaining  credit  generally  on  present  and  future  applications.. 

ances  on  notes  and  bills  bearing  our  signature  or  indorsement,  and  for 

ASSETS 

LIABILITIES 

Cash    n  Hand  and  in  Banks 

• 

Notes  Payable  to  Banks 

Notes  Receivable 

Other  Current  Liabilities  (Itemize) 

Quick  Assets. 

f           d.p;xtures 

Current  and  Deferred  Liabilities. 
Net  Worth  

TOTAL 

TOTAL 

Merchandise.    On  what  basis  valued,  cost  or 

market  

Contingent  Liability.    As  indorser  $  

Finished  $..          Unfinished  $  Raw  «  
If  any  goods  arc  on  consignment,  state  amount  and  circumstances 

AsguarantorJ  No  accounts  have  been  sold  or 

Accounts  and  Notes  Payable.     If   any  ai 

e  past  due  state  amount 

Sales  and  Profits  Last  Fiscal  Year.     Net  sales  $  

During    last     fiscal    year    current    liabilities     were     at     ma 
(S  )  on  .and  at  a  m 

ximum 
nimum 

Accounts  and  Notes  Receivable.      If  any 

>ast  due  or  doubtful  state 

(J  )  on  

Mortgages  and  Other  Liens.    State  due 

date  of  mortgages  and  on 

If   any    amounts    are    due    from    members  of    the  firm,  employees, 
branches  or  similar  sources,  state  amounts  and  circumstances  

Is  mortgage  a  lien  on  any  cu 
I  f  any  other  liens  on  assets,  state  amount  and  ci 

rrent  assets  ?  .  .  . 

Bonds  and  Stocks.     State  general  charactc 

r  and  if  readily  salable  at 

value  stated  

vision  is  made  

Insurance.    Fire,  on  Buildings  $  M 

erchan 

dise  $.  .  .*  Life,  in  favor  of  firm  $  

We  hereby  certify  that  the  foregoing  figures  arc  takoa  from  the  books  of  our  firm  and  that  they  and  the  statements  contained  on  both 
this  sheet  are  true  and  give  a  correct  showing  of  our  financial  condition. 

Signed  this  day  of  191  .....        Firm  K'am« 

sides  of 

By.  ... 

IOVER; 


Member  of  Firm 


CREDIT    STATEMENT FIRMS    USED    BY    FEDERAL    RESERVE    BANK,    NEW    YORK 


ESSENTIALS  IN  GRANTING  CREDIT 


440c 


Federal  Reserve  Rank  of  Now  York  Statement  Form. 
CORPORATION. 


STATEMENT  OF. 


BUSINESS ADDRESS. 


To SANK  OF 

We  make  the  following;  statement  of  all  the  assets  and  liabilities  of  i  his  company  at  the  close  of  business  on and 

give  other  material  information  for  the  purpose  of  obtaining  advances  on  notes  and  bills  bearing  out  signature  or  indorsement,  and  for  obtaining 
credit  generally  on  present  and  future  applications. 


ASSETS 

LIABILITIES 

1 

Notes  Payable  to  Banks  

Notes  Payable  to  Others  

Deposits  

Other  Current  Liabilities  (Itemize)  

Quick  Assets. 

Current  Liabilities.  , 

Bonded  Debt  

Other    Liabilities  (Itemize)  

Current  and  Deferred  Liabilities. 
Capital  Stock  Preferred  , 

Capital  Stock  Common  

Surplus  and  Undivided  Profits  .... 

TOTAL 

TOTAL 

Merchandise.    On  what  basis  valued,  cost  or  ma 
Finished  $  Unfinished  $  
If  any  goods  are  on  consignment,  state  amount 

ket?  

Contingent  Liability.     Asindorser$  

RawJ  
and  circumstances.  . 

As  guarantor  $  No  accounts  have  been  sold 
or  assifjncl  except  as  follows:  

Accounts  and  Notes  Payable.     If   any  ar 

:  past  due  state  amount 

Sales  and  Profits  Last  Fiscal  Year.    Net  s 

fa 

i... 

and  circumstances 

Net  profits  $  Dividends  paid  f  

Accounts  and  Notes  Receivable.      If  any  are  past  due  or  doubtful 

During    last    fiscal    year    current    liabilities    were    at    a    maximum 
($..  )on  

Mortgages  and  Bonds.    State  due  dates  of 

mortgages  and  on  what 

If  any  amounts  arc  due  from  directors,  officers,  employees,  subsi 
branches,  or  similar  sources,  state  amounts  and  circumstances 

liarics, 

State  due  date  of  bonds  and  on  what  assets  a  lien  

Bonds  and  Stocks.    State  general  character  and   whether  readily 

Are  mortgages  or  bonds  a  lien  on  any  current  assets?  
If  any  other  liens  on  assets,  state  amount  and  circumstances  

salable  at  value  stated     

Reserves  and  Depreciation.    State  what  prc 

vision  is  m. 

de  

chandise  f  Life,  in  favor  of  company  S  

We  hereby  certify  that  the  foregoing  figures  arc  taken  from  the  books  of  this  company  and  that  they  and  the  statements  contained  on  bot 
of  this  sheet  are  true  and  give  a  correct  showing  of  the  financial  condition  of  the  company. 


both  sides 


Signed  this. 


.day   of 191....         Name. 


I!. 


(OVER) 

CREDIT  8TATEMEKT CORPORATION.  USED  BY  FEDERAL  RESERVE   BANK,   NEW   YORK 


440d 


THE  PRACTICAL  WORK  OF  A  BANK 


CR-12  Federal  Reserve  Bank  of  Now  York  Statement  Form. 

INDIVIDUAL 
STATEMENT  or FAHMEB  o»  LIVE  STOCK  DEALER. 

BUSINESS ADDRESS 

To BANK  OF 

I  make  the  following  statement  of  all  my  assets  and  liabilities  as  at  the  close  of  business  on . . , and  give 

other  material  information  for  the  purpose  of  obtaining  advances  on  notes  and  bills  bearing  my  signature  or  indorsement  and  for  obtaining  credit 
generally  upon  present  and  future  applications. 

(PLIASr  ANSWER  All  QUISTIOHS  AND  Fill  IH  ALL  «LANK«1 

ASSETS  LIABILITIES 

_ , 

Cash  on  hand  and  in  bank Accounts  owed  by  me 

Accounts  due  to  me— Good Notes  owed  by  me  without  security. 

Unsecured  loans  due  to  me— Good Notesowed  by  me  with  security 

other  than  real  estate. 
Secured  loans  due  to  me 

.Notes  or  mortgages  owed  by  me  with 

Mortgage  loans  due  to  me 

real  estate  as  security . 

Farm  products  on  hand Notes  owed  by  me  with  chattel 

Live  stock  on  hand mortgage  as  security  . 

Farmland  (See  schedule) j   Other  indebtedness  (Itemize). 

"Buildings 

Farm  implements  and  machinery. 

Other  property  (Itemize) 

Total  Liabilities 
Net  Worth . 

TOTAL  TOTAL 

Location  of  Land  Owned  Acres  ,t,™a_tefl  Assessed  at          Mtgd.  for          Insured  for 

Title.     The  legal  and  equitable  title  to  all  pieces  of  above  described  real  estate  is  in  my  name  solely,  except  as  follows: 

Buildings.     State  general  character Contingent  Liability.     As  indorser  f 

Ever  destroyed  by  fire? As  guarantor  $ As  bondsman  for  others  t 

Implements.    State  general  character  of  those  listed'as  assets Accounts  and  Notes  Payable.     II  any  are  past  due  state  amounts  and 

, . . .    reasons 

Growing  Crops.     Outlay  to  date  is  as  follows:  • 

Cost  of  seed t Maximum  Debt.      During  last  calendar  year,  my  total  indebtedness 

"     "  fertilizer f wMata  maximum  ($  ...)on and 

"    "  labor $ at  a  minimum  ($ )on 

Other  costs— (Itemize) ? Other  Liens.    If  any  other  liens  on  assets,  state  am't  and  circumstances 

Total $ 

Insurance.     Fire  ? Life? , 

Who  is  beneficiary? Age.     My  Age  is Married  or  Single 

I  hereby  certify  that  the  figures  and  statements  contained  on  both  sides  of  this  sheet  are  true  and  give  a  correct  showing  of  my  financial  condition. 

Signed  this day  of 197 Name     ,.„ ,.. 

<OVER) 


CREDIT  STATEMENT — FARMER  OB  LIVE  STOCK  DEALER — USED  BT  FEDERAL  RESERVE   BANK,  NEW   YORK 


ESSENTIALS    IN    GRANTING    CREDIT  441 

fifteen  or  twenty  years  and  banks  have  learned  that  they  are 
a  necessary  part  of  credit  operations,  and  the  firm  that  will 
not  make  them  is  not  entitled  to  credit.  Country  banks 
even  yet  operate  under  the  old  rule,  but  the  banks  in  all  the 
larger  places  are  now  coming  to  see  the  importance  of  accu- 
rate and  up-to-date  credit  information. 

The  statement  is  the  basis  for  all  the  other  information, 
since  it  contains  the  basic  element  of  property  worth.  The 
form  of  the  statement  in  vogue  to-day  is  an  evolution  that 
has  come  through  the  experiences  of  banks  and  credit  organ 
izations  working  together  to  devise  a  form  complete  and  yet 
simple.  Most,  if  not  all,  banks  now  have  forms  of  their 
own,  these  being  more  or  less  standardized,  so  that  uniform 
statements  are  now  quite  common.  These  statements  are 
made  or  should  be  made  at  least  yearly  and  a  comparative 
statement  form  used,  where  the  various  items  from  year  to 
year  may  be  set  opposite  one  another  for  comparison  pur- 
poses. 

THE  STATEMENT  MUST  BE  RECENT 

The  statement  is  a  digest  of  the  firm's  books  and  is  in- 
tended to  show  the  true  condition  of  the  business  at  the  time 
of  the  audit,  which  should  be  by  an  independent  party  whose 
sole  object  is  to  present  a  true  statement,  conservative  and 
safe,  as  a  basis  of  borrowing. 

It  must  be  recent,  not  over  a  year  old,  preferably  with- 
in six  months.  Banks  now  have  standard  forms  for  this 
purpose,  so  that  the  information  desired  will  be  given  by  all 
borrowers  alike  and  not  only  includes  the  balance  sheet,  but 
the  statement  of  profit  and  loss  account. 

It  is  more  important  that  the  bank  shall  know  that  the 
firm  has  made  and  is  making  money,  than  it  is  to  ascertain 
that  it  has  certain  property  and  property  rights.  Its  prof- 
its pay  the  proprietors  for  conducting  the  concern;  out  of 
the  process  of  making  the  profits  the  concern  must  pay  its 
loans,  and  out  of  the  property  the  loans  must  be  paid  if  the 
business  as  a  going  concern  fails  to  show  a  profit.  The 
banker  who  loans  without  a  statement  loans  in  the  dark. 
The  statement  is  the  lighthouse  guiding  him  which  way  to 
steer. 


•142  THE    PRACTICAL  WORK  OF   A   BANK 

FALSE  STATEMENTS 

There  is  always  the  danger  that  the  statement  may  be 
false,  and,  therefore,  of  little  use  as  a  basis  of  credit.  It 
may  be  wilfully  false  or  unconsciously  false.  It  depends 
largely  upon  the  moral  status  of  the  borrower.  In  many 
cases  it  is  the  result  of  poor  bookkeeping  methods,  the  bor- 
rower being  himself  deceived.  It  has  been  said  that  it  is 
not  the  customer  with  intent  to  deceive  who  brings  the  losses, 
but  the  customer  who  is  himself  deceived.  He  overestimates 
himself,  is  overconfident  of  success ;  overreaches  himself,  and 
jeopardizes  his  own  and  the  bank's  funds.  And  here  the 
value  of  an  independent  audit  is  coming  to  be  recognized. 
Clearing-houses  are  taking  the  matter  up,  and  lending 
weight  to  the  movement  to  make  independent  audits  com- 
pulsory as  a  prerequisite  to  loans.  And  if  this  audit  is 
made  by  a  recognized  firm  of  standing,  whose  work  is  well 
known  for  its  quality,  there  is  no  risk  in  the  statement 
being  false. 

Some  firms  have  been  sending  in  statements  signed  by 
clerks,  bookkeepers  and  other  irresponsible  employees,  and 
this  should  not  be  countenanced.  The  Federal  Reserve 
Board  will  require  sworn  statements  of  condition.  The  ob- 
taining of  goods  under  false  pretences  has  always  been  a 
crime,  and  to  obtain  credit  should  all  the  more  be  so.  Under 
the  coaching  of  credit  men  and  banking  organizations  sev- 
eral States  have  enacted  stringent  laws  making  the  giving 
of  a  statement  which  is  false  for  the  purpose  of  obtaining 
credit  a  penal  offense,  as  it  should  be. 

STATEMENT  RECIPROCAL  IN  VALUE 

The  National  Association  of  Credit  Men  has  realized 
the  reciprocal  value  of  the  signed  statement  and  steadily 
advocated  its  use  as  a  benefit  to  both  borrower  and  lender. 
In  a  treatise  on  the  subject  the  association  says: 

"Good  credit  in  the  markets  of  the  world  enables  every 
merchant  to  add  to  his  ability  to  do  business.  It  gives  him 
the  use  of  enlarged  capital,  thus  enabling  him  to  carry  a 
more  complete  stock,  increase  his  sales,  and  magnify  his 
profits. 

"Large  assets  are  not  always  necessary  to  the  creation 


ESSENTIALS    IN    GRANTING    CREDIT  448 

of  credit;  what  is  most  desirable  is  that  credit  be  in  relative 
proportion  to  the  actual  assets,  and  in  harmony  with  condi- 
tions which  create  and  maintain  it.  A  merchant's  capital 
is  the  sum  of  his  net  available  resources,  plus  his  credit.  The 
giver  of  credit  is  a  contributor  of  capital,  and  becomes,  in  a 
certain  sense,  a  partner  of  the  debtor,  and,  as  such,  has  a 
perfect  right  to  complete  information  of  the  debtor's  condi- 
tion at  all  times. 

"Credit  is  given  a  merchant  because  of  the  confidence 
reposed  in  him.  Requesting  a  statement  when  credit  is 
asked  is  not  a  reflection  on  one's  character,  honesty,  or  busi- 
ness ability,  but  is  done  to  secure  information  to  enable 
business  to  be  conducted  intelligently. 

"When  a  statement  is  made  it  should  be  absolutely  cor- 
rect. To  make  it  so  necessitates  the  taking  of  at  least  an 
annual  inventory  and  the  keeping  of  an  accurate  set  of 
books.  Statement  giving,  therefore,  will  tend  to  make  a 
debtor  a  better  buyer,  because  more  familiar  with  his  stock, 
more  careful  in  giving  credit,  more  conservative  in  incurring 
debt,  and  will  result  in  a  better  knowledge  of  his  business 
generally. 

"A  merchant  who  desires  to  serve  his  own  best  interests 
should  recognize  that  his  most  valuable  possession,  apart 
from  his  actual  assets,  is  a  sound,  substantial  and  unques- 
tioned reputation  as  a  credit  risk,  and  that,  under  the  pre- 
vailing conditions  and  demands  of  business,  the  most  effec- 
tive, and  eminently  the  best  way  to  prove  his  basis  for  credit, 
is  to  be  willing  to  submit  a  statement  of  his  financial  condi- 
tion." 

ANALYZING  A  STATEMENT  OF  CONDITION 

The  statement  should  show  the  assets  and  liabilities  in 
the  following  order: 

Quick  Assets — Cash  on  hand  and  in  bank,  bills  receiv- 
able, accounts  receivable,  merchandise. 

Quick  Liabilities — Notes  payable,  accounts  payable, 
other  quick  liabilities. 

We  then  have  the  Fired  Assets — Land,  buildings,  ma- 
chinery and  fixtures,  good  will,  other  investments. 

The  Fixed  Liabilities — Mortgages,  bonds  and  other  fixed 
liabilities. 


144,  THE    PRACTICAL  WORK  OF   A   BANK 

The  intent  of  this  classification  is  to  permit  the  ratio 
of  quick  assets  to  quick  liabilities  to  be  quickly  determined. 
The  proportion  that  quick  assets  should  bear  to  quick  lia- 
bilities is  a  matter  of  opinion.  It  depends  upon  the  trade. 
Some  credit  men  make  it  a  rule  to  have  at  least  two  to  one — 
two  and  a  half  to  one  if  possible.  But  in  such  lines  as  meats, 
one  and  a  half  to  one  would  be  considered  ample;  while  in 
wholesale  hardware,  groceries  and  dry  goods  one  and  three- 
quarters  to  one  is  considered  ample,  or  at  least  enough,  by 
the  rules  already  stated. 

Two  TO  ONE 

Quick  assets  are  bound  to  shrink  during  the  process  of 
collection,  accounts  receivable  particularly,  and  there  must 
be  a  margin  of  safety,  and  this  margin  depends  upon  the 
business  and  the  methods  of  the  men  in  charge  and  general 
conditions;  but  the  ratio  of  two  to  one  is  considered  suffi- 
cient under  ordinary  conditions;  for  if  this  be  not  enough 
things  are  in  a  bad  way. 

While  the  ratio  of  safety  naturally  varies  with  different 
lines  of  business  and  each  case  must  be  considered  on  its 
merits,  a  careful  banker  will  be  inclined  to  avoid  buying  com- 
mercial paper  of  concerns  whose  statement  does  not  show  a 
ratio  of  quick  assets  to  current  liabilities  of  at  least  two  to 
one.  On  this  basis,  any  shrinkage  of  the  working  assets  in 
liquidation  less  than  fifty  per  cent,  will  still  leave  a  margin 
over  the  debts.  But  in  the  case  of  a  concern  whose  ratio  of 
quick  assets  to  liabilities  is  only  1.50  to  1.00,  it  is  evident  that 
any  shrinkage  of  one-third  in  the  quick  assets  will  endanger 
the  prompt  payment  of  the  creditors'  claims. 

While  fifty  per  cent,  is  a  liberal  margin  of  safety,  it 
must  be  remembered  that  a  statement  is  usually  made  when 
the  liabilities  are  smallest,  and  if  a  concern  cannot  show 
quick  assets  of  twice  the  current  debts  at  that  time,  there 
will  probably  in  the  height  of  its  season  be  only  a  very  small 
margin  of  quick  assets  above  the  debts,  so  that  a  shrinkage 
amounting  to  only  a  small  percentage  of  the  assets  will  wipe 
out  the  excess  of  quick  assets  over  the  current  liabilities,  and 
will  thus  endanger  the  prompt  payment  of  the  maker's  note. 

In  this  analysis  both  the  slow  assets,  such  as  real  estate, 
fixtures,  obscure  investments,  etc.,  and  the  slow  liabilities, 
such  as  mortgages,  bonds,  special  capital,  etc.,  may  be  ig- 


ESSENTIALS    IN    GRANTING    CREDIT  445 

nored;  because  it  may  be  safely  assumed  that  in  the  brief 
period  that  commercial  paper  has  to  run  there  will  be  no  ma- 
terial change  in  such  fixed  assets  or  slow  liabilities. 

The  banker  is  not  confined  to  deductions  from  the  bor- 
rower's figures  in  determining  the  degree  of  convertibility  of 
the  latter's  assets.  An  actual  and  consistent  test  of  con- 
vertibility is  furnished  him  in  the  manner  in  which  the  con- 
cern meets  its  current  trade  bills.  The  assets  of  a  merchant 
who  is  able  to  discount  all  of  his  accounts  payable  are  evi- 
dently more  liquid  than  those  of  a  merchant  who  requires 
the  full  terms,  in  spite  of  an  attractive  discount  offered  for 
earlier  payment.  And  if  a  merchant,  in  addition  to  the  reg- 
ular terms  of  purchase,  is  tardy  in  meeting  his  merchandise 
debts,  it  is  evident  that  his  assets  are  not  turned  into  cash  as 
readily  as  they  should  be,  either  because  the  merchant  is  not 
moving  his  goods,  because  he  is  selling  to  a  poor  class  of 
trade  and  his  collections  are  slow,  because  he  is  carrying  too 
large  a  stock  of  merchandise,  or  because  he  is  trying  to  do 
too  large  a  business  for  his  capital. 

Whatever  the  reason,  when  a  banker  learns  that  a  bor- 
rower is  slow-paying,  it  behooves  him  to  use  great  caution  in 
loaning;  and  if  the  condition  is  chronic,  the  risk  outweighs 
the  profit  on  the  transaction,  and  the  credit  should  be  dis- 
continued. Tardy  payments  are  not  only  a  sure  sign  of  im- 
mobility in  the  assets,  but  they  place  the  merchant  at  the 
mercy  of  his  creditors,  who  may  at  any  time  petition  him  into 
bankruptcy,  and  the  percentage  of  the  shrinkage  of  assets 
in  the  hands  of  receivers  is  too  well  known  for  comment. 

In  analyzing  the  figures,  it  is  very  important  to  note  the 
ratio  of  liabilities  to  capital;  the  heavier  the  debts  (other 
things  being  equal),  the  greater  the  risk,  because  a  less 
shrinkage  or  loss  of  assets  is  necessary  to  make  them  inade- 
quate to  liquidate  the  debts.  For  instance,  if  the  liabilities 
are  half  the  assets,  a  shrinkage  of  fifty  per  cent,  would  be 
required  to  cause  a  loss  to  the  creditors;  but  if  the  debts  are 
two-thirds  of  the  assets,  a  shrinkage  of  only  thirty-three  per 
cent,  would  be  required.19 

CASH 

While  a  large  amount  of  cash  is  not  desirable,  or  in  some 
cases  necessarv,  there  should  be  a  fair  bank  balance  as  a  mat- 


i»Oscar  Newfang  in  The  Bankers  Magazine. 


446  THE   PRACTICAL   WORK  OF   A   BANK 

ter  of  courtesy  to  the  bank,  as  well  as  a  quick  source  of  funds 
for  the  daily  need  of  the  business.  A  proper  working  bal- 
ance is  always  desirable.  In  the  panic  of  1907  some  firms 
did  not  have  two  weeks'  payroll  on  hand  and  were  hard 
put  for  ready  money.  Various  concerns  look  at  this  prop- 
osition differently.  For  a  concern  that  is  borrowing 
from  one  bank  only,  it  is  perhaps  not  so  important  that  they 
carry  large  cash  balances,  provided  the  bank  does  not  insist 
upon  it.  If,  however,  they  are  seeking  credit  from  banks  all 
over  the  country  by  placing  their  paper  through  brokers, 
they  should  be  able  to  show  that  they  will  be  able  to  take  up 
part  of  their  obligations  if  presented,  without  great  diffi- 
culty. This  means  that  they  ought  to  have  an  ample  cash 
balance. 

The  cash  should  not  be  too  large,  for  it  represents  idle 
money;  neither  should  it  be  too  small,  for  it  may  inconven- 
ience the  firm.  Just  the  proper  proportion  depends  upon  the 
nature  of  the  business. 

Cash  on  hand  and  in  banks  is  usually  worth  its  listed 
amount.  If  any  "I.  O.  U.'s"  are  in  the  cash,  of  course,  they 
should  be  eliminated,  as  well  as  all  cash  items  that  are  not 
cash  or  equivalent  to  cash.  Because  cash  has  been  paid  for  a 
piece  of  paper  it  does  not  follow  that  cash  will  be  received 
for  it. 

BILLS  RECEIVABLE. 

Many  progressive  concerns  prefer  to  carry  open  accounts 
rather  than  have  on  hand  their  customers'  notes.  As  a  con- 
sequence this  item  has  more  or  less  given  way  to  accounts  re- 
ceivable. Where  such  bills  receivable  do  figure  prominently 
we  must  be  careful  to  learn  their  exact  nature.  They  may 
be  clean  merchandise  notes,  easily  collected,  or  they  may  be 
old  notes  which  have  been  renewed  time  and  again,  and  en- 
larged by  added  interest.  In  but  few  lines  are  notes  now 
given,  and  they  do  not,  as  a  rule,  appear  in  large  volume  in 
the  average  statement. 

Do  these  include  any  notes  of  the  firm,  officers,  em- 
ployees, or  others  interested,  whose  collection  would  be  un- 
pleasant, if  not  impossible?  Do  they  represent  money 
loaned?  They  should  be  for  goods  sold  and  delivered,  or 
for  open  accounts  settled  by  note,  and  if  for  the  latter  pur- 
pose, the  account  should  not  be  of  long  standing.  An  over- 
due account  settled  by  a  note  is  not  a  healthy  asset. 


ESSENTIALS    IN    GRANTING    CREDIT  447 

Are  any  of  these  notes  pledged,  or  rediscounted  and  in- 
cluded in  bills  receivable?  Are  any  past  due?  Have  any 
been  renewed  or  extended?  How  much  of  this  item  repre- 
sents amounts  due  from  branch  houses,  affiliated  concerns, 
etc.,  "a  wheel  within  a  wheel"? 

It  is  a  difficult  yet  an  important  part  of  the  statement 
analysis  to  determine  if  the  ratio  between  the  various  assets 
is  normal  for  the  business.  To  do  this  accurately  requires 
a  general  knowledge  of  the  terms  and  customs  of  the  busi- 
ness. For  instance,  in  raw  silk  the  terms  are  six  months' 
note,  and  we  would  expect  a  high  ratio  of  bills  receivable, 
and  a  small  accounts  receivable.  In  sugar  refining  the  terms 
are  seven  days  net,  and  a  similar  ratio  would  indicate  that 
something  was  wrong.  There  should  be  few,  if  any,  receiv- 
ables in  sugar. 

Lumber,  raw  fur  and  other  concerns  sell  on  notes,  and 
we  may  expect  to  find  these  in  considerable  quantity  in  their 
statements.  Agricultural  implements  are  also  sold  on  notes, 
running  over  a  series  of  months,  and  these  we  would  expect 
to  find  in  large  volume  in  such  a  concern.  Automobiles, 
scales,  cash  registers,  etc.,  are  likewise  sold  on  notes,  due 
serially,  and  while  these  are  in  the  main  good,  they  mature 
slowly;  and  in  case  of  failure  of  the  concern  would  be  slow 
in  collection;  for  as  soon  as  a  house  fails  it  becomes  difficult 
to  collect  outstanding  accounts.  In  a  recent  reorganization 
of  a  large  department  store  in  New  York,  it  was  found  that 
the  regular  customers  would  pay  their  bills  contracted  after 
the  store  reopened  in  preference  to  making  payment  of  the 
old  balances. 

The  firm  that  sells  on  note  should  not  have  a  high  pro- 
portion of  accounts  receivable,  and  a  business  where  the 
credit  is  on  book  account  should  not  have  many  notes  in  its 
assets.  The  two  forms  of  credit  should  not  appear  together. 
Notes  are  often  taken  to  settle  overdue  accounts,  and  indi- 
cate that  the  maker  is  not  in  funds.  If  he  cannot  take  his 
discounts  and  meet  the  terms  of  the  sale,  he  is  a  doubtful 
risk,  although  not  necessarily  a  bad  one. 

ACCOUNTS  RECEIVABIJ: 

Accounts  receivable  should  be  the  undisputed  obligations 
of  customers  of  the  concern.  They  should  stand  in  the  place 


448  THE    PRACTICAL  WORK  OF   A   BANK 

of  merchandise  sales,  which  they  truly  represent,  and  should 
be  absolutely  free  from  pledge.  They  are  the  best  quick  as- 
set, next  to  cash,  and  should  be  of  recent  date,  properly  scaled. 

Accounts  receivable  are  the  measure  of  the  merchant's 
ability  to  sell  as  applied  to  merchandise.  Merchandise  by 
itself  is  an  asset  without  life.  It  does  not  sell  itself.  But 
book  accounts,  well  selected,  will  automatically  turn  into 
money  by  the  process  of  time,  and  at  little  expense.  Even 
the  death  of  the  proprietor  will  not  affect  this  process.  The 
debt  must  be  paid. 

Are  all  such  accounts  due  from  customers?  Are  any 
fictitious?  Have  the  doubtful  accounts  been  eliminated? 
How  much  has  been  allowed  for  depreciation  in  the  collec- 
tion of  these?  Are  any  of  these  pledged  to  factors  or  com- 
mercial bankers  or  banks. 

How  much  of  this  amount  is  due  from  branches  and  af- 
filiated concerns?  What  are  the  terms  of  sale?  Is  there  a 
good  collection  department?  What  proportion  of  bad  debts 
is  charged  off  yearly? 

Are  the  accounts  and  bills  receivable  for  a  short  time  and 
being  constantly  turned  over?  When  a  corporation's  note, 
usually  at  four  or  six  months'  maturity,  is  bought,  you  ought 
to  know  that  the  corporation  is  likely  to  receive  returns  from 
sales  of  their  merchandise  in  an  equally  short  time,  so  that 
they  are  not  depending  on  re-borrowing  to  pay  off  maturing 
obligations. 

Another  important  factor  is  the  relation  of  the  accounts 
receivable  to  the  merchandise.  Conservative  credit  men  are 
expressing  a  preference  in  the  ordinary  wholesale  and  job- 
bing lines  for  a  long  line  of  receivables  rather  than  a  large 
stock  of  merchandise.  An  eminent  New  York  credit  man 
once  said  that  if  you  have  any  suspicions  regarding  a  state- 
ment, ask  the  maker  to  submit  a  detailed  list  of  his  accounts 
receivable  with  the  dates  of  the  invoices.  If  he  is  attempting 
to  deceive,  such  a  request  will  invariably  bring  him  into  the 
open. 

The  yearly  sales  are  also  valuable  as  a  guide  to  the  condi- 
tion of  the  accounts  receivable.  Having  the  total  yearly 
sales,  they  may  be  divided  into  monthly  averages,  and  the 
average  sales  determined.  If  the  terms  of  sale  are  thirty 
days,  the  firm  should  not  have  over  forty-five  days'  sales  on 
its  books,  and  if  so,  it  shows  that  credit  is  too  loosely  extend- 


ESSENTIALS    IN    GRANTING    CREDIT  449 

ed  and  collections  too  slow.  It  might,  of  course,  be  due  to 
heavy  sales  just  preceding  the  time  of  statement,  or  a  pre- 
vailing depression  making  collections  slow,  but  the  reason 
should  be  ascertained.  Every  overdue  account  represents 
idle  capital  of  the  firm  which  is  doing  nothing.  The  bor- 
rower might  be  asked  to  classify  his  accounts  into  thirty  and 
sixty-day  and  overdue  accounts,  to  show  the  condition  of  his 
collections. 

When  the  amount  of  the  annual  sales  is  not  obtainable,  a 
fairly  accurate  idea  of  the  activity  of  the  business  may  be 
obtained  by  noting  the  amount  of  the  accounts  and  bills  re- 
ceivable, and  considering  this  in  conjunction  with  the  cus- 
tomary terms  of  the  business.  For  instance,  in  a  line  extend- 
ing terms  of  two  per  cent.,  ten  days,  sixty  days  net,  good 
customers'  receivables  of  $200,000  would  be  a  reasonable  as- 
surance that  the  annual  sales  were  well  over  $1,000,000.  This 
applies  only  to  lines  in  which  business  is  done  upon  credit ;  a 
retail  cash  business  could  not  be  judged  in  the  same  way. 

MERCHANDISE 

Merchandise  is  the  most  difficult  of  all  the  assets  to  cor- 
rectly analyze  or  appraise.  In  this  item  there  may  be  gross 
overstatements  and  gross  frauds.  Goods  are  worth,  not  their 
cost,  but  what  they  will  bring.  But  to  appraise  merchan- 
lise  at  its  selling  price  is  to  gamble  on  the  sale,  and  anticipate 
profits.  No  accountant  will  accept  inventory  at  selling 
prices.  Cost  is  the  nearest  correct  basis,  inasmuch  as  cost  at 
least  must  be  realized  or  bankruptcy  must  quickly  follow. 

If  the  merchandise  is  seasonable  and  salable,  the  credit 
man  could  tell,  by  knowing  the  turn-over  for  the  year,  about 
how  long  it  would  take  to  turn  it  into  money.  In  a  stock  of 
meats,  a  few  weeks  would  turn  the  stock  into  cash.  Gro- 
ceries a  litttle  longer;  dry  goods  a  little  longer;  furniture  a 
little  longer;  drugs  a  little  longer,  and  so  on  as  the  goods 
become  less  and  less  of  the  necessity  class  and  get  into  the 
luxury  class.  Some  old  stocks  could  hardly  be  given  away.* 

It  is  said  that  a  well-managed  department  store  will  not 
order  a  large  number  of  a  new  book ;  but  if  it  anticipates  the 
sale  of  a  hundred  copies,  it  buys  ten;  orders  ten  more  when 

*In  the  collapse  of  prices  during  1930,  the  real  value  of  merchandise  was  the 
most  difficult  part  of  business  administration.  "Inventory"  was  the  most  trouble- 
some item  in  the  statement. 


450  THE   PRACTICAL  WORK   OF   A   BANK 

eight  are  sold,  and  so  on  until  the  demand  slackens,  and  thus 
it  finds  no  dead  stock  on  its  shelves. 

Where  the  merchandise  is  both  finished  and  unfinished, 
it  frequently  happens  that  either  or  both  are  quickly  salable, 
and,  therefore,  quick  as  an  asset;  while  in  the  manufacture 
of  heavy  articles  such  as  machinery,  the  raw  material  is  mere- 
ly iron  and  steel,  while  the  manufactured  article  may  be  a 
printing  press. 

Too  many  of  the  old-time  merchants,  and  some  of  the 
least  experienced  of  the  modern  school,  are  inclined  to  value 
merchandise  in  their  financial  statement  at  cost,  and  as  a 
result  they  go  on  year  after  year  deceiving  themselves  as  to 
their  real  financial  standing.  The  value  of  merchandise  to 
the  merchant  for  the  balance  sheet,  or  other  purposes,  is 
determined  by  reducing  the  real  selling  value  by  a  percen- 
tage that  will  cover  expenses  and  show  a  profit  when  it  is 
sold. 

INVENTORY 

Messrs.  Ernst  and  Ernst,  official  auditors  and  system- 
atizers  for  the  National  Retail  Dry  Goods  Association,  give 
this  as  the  rule  for  inventory:  "The  real  value  of  any  stock 
of  goods  should  be  based  upon  selling  price  less  original  per 
cent,  of  mark  up,  representing  the  profit.  From  our  wide 
experience  in  dry  goods  and  department  stores  throughout 
the  country,  we  have  found  that  each  store  has  a  uniform 
percentage  of  profit  which  it  aims  to  obtain  in  selling  goods, 
and  when  the  selling  price  is  reduced  we  believe  the  inven- 
tory valuation  should  be  correspondingly  reduced.  As  an 
example:  When  an  article  costs  $1.00  and  is  sold  for  $1.50, 
the  percentage  of  mark-up  is  thirty-three  and  one-third  per 
cent.  If  this  article  is  reduced  to  sell  for  $1.00,  we  believe 
the  inventory  value  should  be  reduced  one-third,  or  to  sixty- 
six  and  two-thirds  cents,  leaving  a  mark-up  of  thirty-three 
and  one  third  per  cent,  on  the  selling  price."22 

Pertinent  questions  in  regard  to  merchandise  are :  Is  it 
finished  or  unfinished  ?  How  and  by  whom  and  when  was  it 
valued?  Is  any  merchandise  hypothecated,  or  under  trust 
receipt?  Is  the  stock  fresh  and  seasonable?  How  much  is 
held  under  consignment? 

York  Timet,  April  6,  1914. 


ESSENTIALS    IN    GRANTING    CREDIT  461 

A  careful  credit  man  would  not  make  large  advances  to 
a  merchant  whose  assets  consisted  mainly  of  merchandise  on 
hand.  It  must  not  be  on  his  shelves,  but  on  his  books  in 
part,  at  least,  and  turning  over  frequently. 

The  liquidity  of  a  stock  of  goods  may  be  seen  by  a  simple 
example  of  a  small  country  grocery,  which  has  a  stock  of  not 
over  $500  and  yet  its  total  sales  are  over  $10,000  a  year,  in- 
dicating that  the  stock  comes  in  and  goes  out  twice  each 
month.  This,  of  course,  is  unusual;  but  all  business  should 
turn  over  periodically,  so  that  dead  stock  does  not  accu- 
mulate. 

Many  bankers  seem  to  place  greater  stress  upon  an  out- 
side audit  of  the  borrower's  books  than  upon  his  moral  char- 
acter, in  estimating  the  reliance  to  be  placed  upon  his  fig- 
ures. While  an  audit  is  certainly  of  some  advantage,  it  must 
be  remembered  that  the  auditor's  limited  time  never  permits 
him  to  verify  inventories  by  actual  count,  nor  does  he  usually 
verify  the  accounts  and  bills  receivable  by  actual  correspond- 
ence with  the  debtors.  That  there  is  no  other  indebtedness 
than  the  amount  shown  by  the  books,  he  has,  of  course,  no 
means  of  knowing.20 

Do  the  accounts  receivable  bear  the  proper  ratio  to  the 
merchandise  on  hand?  In  other  words,  are  they  converting 
their  merchandise  into  accounts  receivable  and  not  allowing 
it  to  accumulate  on  their  floors?  We  can  determine  about 
this  if  we  know  their  total  volume  of  sales  and  terms  of  their 
sales.  For  instance,  if  they  sell  on  ninety-day  terms  and 
get  their  money  on  an  average  of  four  months,  and  the 
total  sales  are  $900,000,  we  would  conclude  that  their  amount 
of  merchandise  at  any  one  time  should  be  about  $300,000, 
or  one-third  of  their  total  sales.  In  this  case  we  assume  the) 
turn  over  their  money  three  times  a  year. 


TRUST  RECEIPTS 

Many  kinds  of  merchandise  are  assets  which  can  be 
pledged  with  warehouses  against  advances.  This  furnishes 
another  example  of  the  care  that  must  be  exercised  by  a 
banker  who  makes  loans  on  the  security  of  the  general  assets 


soOscar  New  fang  ante  p.  445, 


452  THE    PRACTICAL  WORK   OF   A   BANK 

of  a  business  to  prevent  a  preference  in  favor  of  other  cred- 
itors. The  value  of  the  merchandise  stock  will  depend  large- 
ly upon  whether  the  goods  are  durable  or  perishable,  staples 
or  specialties,  luxuries  or  necessities.  If  they  have  been  im- 
ported under  a  commercial  letter  of  credit  and  the  foreign 
exchange  dealer  has  not  been  paid,  under  the  form  of  trust 
receipt  commonly  used,  he  has  a  claim  against  the  merchan- 
dise in  any  form  into  which  it  has  been  converted,  provided 
it  can  be  traced — that  is,  he  can  seize  the  goods,  he  can  seize 
the  accounts  arising  from  their  sale,  or  attach  the  money  rep- 
resenting the  proceeds  of  collections  if  it  is  earmarked  in  any 
way  to  permit  identification.21 


CAPITAL  ASSETS 

The  opinion  as  to  the  value  of  capital  assets  is  wide. 
Whether  land,  buildings  and  machinery  add  worth  to  the 
concern  is  open  to  discussion,  and  there  is  a  difference  of 
opinion  among  credit  men.  If  the  fixed  assets  were  to  be 
turned  into  money  it  would  stop  the  whole  business  to  real- 
ize upon  them,  so  that  selling  the  fixed  assets  is  out  of  the 
question;  while  in  the  case  of  liquid  assets,  it  is  presumed 
th'at  they  will  automatically  turn  into  money,  and  keep  the 
business  going. 

The  banker  likes  liquidity  of  assets.  He  cannot  collect  a 
loan  out  of  brick  and  mortar  half  so  quickly  as  out  of  a 
stock  of  goods.  And  land  and  buildings  never  can  be  sold 
as  quickly  as  merchandise. 

A  firm  in  Brooklyn  at  one  time  based  its  worth  mainly 
upon  a  large  tract  of  well  located  dock  property.  It  was  its 
principal  asset.  For  seven  years  it  has  been  trying  to  sell 
that  property  and  it  remains  to-day  on  the  market  as 
unsalable.  It  carried  the  firm  down.  If  the  property  is 
mortgaged,  of  course  only  the  equity  can  be  considered,  and 
so  many  properties  have  a  limited  utility  that  this  must  be 
considered  even  in  allowing  for  the  equity.  A  specially 
erected  building  may  have  value  to  the  concern  for  whom 
it  was  erected,  and  yet  to  any  other  would  lose  much  of  its 
value.  If  a  concern  has  its  capital  too  largely  in  fixed  as- 
sets, land,  buildings  and  machinery  its  bankers  must  carry 

«F.  B.  Snyder  ante. 


ESSENTIALS    IN    GRANTING    CREDIT  458 

its  liquid  affairs.  Working  capital  must  come  from  some- 
where and  it  devolves  upon  the  banks  to  furnish  it. 

Current  liabilities  should  not  be  incurred  for  fixed  pur- 
poses. A  building  should  be  erected  from  the  mortgage 
loan  at  the  savings  bank  and  not  from  commercial  paper 
sold  in  the  market;  and  the  mortgage  loan  should  not  carry 
merchandise  from  the  manufacturer  to  the  consumer.  Liquid 
loans  for  liquid  purposes,  and  fixed  loans  for  fixed  purposes 
should  be  the  rule. 

Pertinent  questions  relative  to  the  real  estate  are:  Land 
— what  is  its  value?  Buildings — how  old?  What  rental 
do  you  pay?  What  is  the  fair  market  value?  By  whom 
was  this  value  placed,  and  when?  What  provision  is  made 
for  depreciation  of  the  buildings,  the  plant  and  machinery? 
What  insurance  is  carried?  What  is  the  assessment?  Are 
the  taxes  and  assessments  paid? 


MACHINERY  AND  FIXTURES 

Machinery  and  fixtures  are  so  very  uncertain  as  an  as- 
set that  they  can  hardly  be  considered  an  asset  at  all.  Ma- 
chinery wears  out,  becomes  obsolete,  and  is  soon  scrapped  by 
time  and  advancing  improvements,  if  not  by  the  owner.  It 
is  a  slow  if  not  a  doubtful  asset  wherever  it  appears. 

Is  the  physical  property  in  good  shape?  While  a  bank- 
er does  not  look  at  the  items  of  plant  and  machinery  as 
closely  as  those  in  the  quick  asset  column,  yet  it  is  very  im- 
portant to  know  that  the  manufacturer,  for  instance,  has  a 
good  plant,  well  adapted  to  his  uses,  well  protected  from 
fire  loss  and  conveniently  situated  to  transportation.  This 
naturally  brings  up  the  next  question. 

Is  depreciation  on  the  permanent  investment  taken  care 
of?  The  banker  should  insist  that  the  borrower  depreciate  the 
book  value  of  his  plant  and  equipment  each  year  correspond- 
ing to  their  actual  loss  in  value  through  use.  The  conserva- 
tive manufacture  will  always  do  this  as  he  does  not  want  to 
deceive  himself,  let  alone  his  creditors. 

"Other  investments"  will  include  stocks  and  bonds  of 
other  corporations,  stocks  held  in  affiliated  concerns,  and 
other  investments  which  must  be  investigated  to  know  their 
marketable  value  before  they  may  be  allowed  in  the  state- 


154  THE   PRACTICAL  WORK  OF   A   BANK 

ment  at  all.     Some  such  holdings  would  be  prime  security 
and  prime  assets;  others  would  be  of  no  value. 

LIABILITIES 

The  principal  quick  liabilities  are  notes  payable  and  ac- 
counts payable.  Notes  payable  are  of  four  classes:*  Notes 
given  for  merchandise,  and  not  settled  by  book  account; 
notes  payable  to  the  dealer's  bank;  notes  payable  through 
brokers,  and  notes  given  for  other  things,  such  as  fixtures, 
machinery,  etc.,  not  classified  as  merchandise,  together  with 
notes  given  for  advances  of  funds  for  capital  purposes. 

The  merchant  should  not  issue  notes  for  merchandise  and 
borrow  in  the  open  market  at  the  same  time;  his  open  mar- 
ket borrowing  is  for  the  purpose  of  taking  his  discounts  and 
he  ought  not  to  pay  by  note.  If  the  custom  of  the  trade 
is  to  settle  by  note,  as  in  lumber,  payables  are  legitimate,  but 
not  otherwise. 

Bills  payable  should  be  either  for  merchandise  or  for 
money  borrowed.  If  for  the  latter  they  would  usually  be 
payable  to  banks  or  note  brokers.  Many  houses  are  judged 
by  the  brokers  offering  their  paper  on  the  market.  A  re- 
liable house  can  ill  afford  other  than  a  first-class  broker  to 
perform  this  very  important  task.  Here  we  have  an  insight 
into  a  concern's  ability  to  finance.  If  they  are  putting  much 
paper  on  the  market  they  should  be  reserving  their  credit  at 
the  bank,  and  vice  versa.  If  we  find,  however,  that  in  pro- 
portion to  their  business  they  are  utilizing  both  means  to 
their  limit  and  also  giving  notes  for  merchandise,  we  may 
judge  that  they  are  "sailing  close  to  the  wind,"  a  signal  for 
us  to  reef  the  sails  of  our  credit  line. 

Unless  it  is  a  custom  of  the  trade  to  settle  bills  in  this 
way,  it  indicates  overtrading  and  undercapitalization,  both 
conditions  which  must  be  promptly  reckoned  with  if  a  crash 
is  to  be  averted.  In  some  statements  the  "bills  payable"  are 
not  separated,  but  the  presence  of  odd  cents  is  sufficient  to 
put  one  on  inquiry,  unless,  under  the  concern's  bookkeeping 
system,  unearned  interest  is  deducted  from  the  gross  "notes 
payable"  and  only  the  net  recorded.  If  the  concern  is  selling 
its  paper  in  the  open  market,  the  notes  payable  to  banks 
should  be  comparatively  small,  as  the  conservative  borrower 
keeps  his  bank  lines  open  when  his  paper  is  on  the  street. 


ESSENTIALS    IN    GRANTING    CREDIT  455 

Probably  no  other  item  in  the  depositor's  statement  can  be 
more  readily  checked  than  this  one  and  no  other  is  more  im- 
portant. A  recent  case  is  recalled  where  an  investi- 
gation which  consumed  half  an  hour  and  the  writing  of  one 
letter,  revealed  a  discrepancy  of  nearly  $20,000  and  finally 
resulted  in  a  receivership  and  reorganization.23 

Queries  regarding  notes  payable:  How  much  is  carried 
with  your  own  bank?  How  much  on  the  market?  What 
banks  do  you  deal  with?  When  do  you  borrow  at  home? 
When  in  the  market?  How  much  through  each?  Do  you 
borrow  continuously  in  the  market?  Do  you  discount  all 
bills? 

ACCOUNTS  PAYABLE 

If  we  find  that  bills  payable  is  a  large  item,  then  ac- 
counts payable  should  be  inversely  small.  The  proceeds 
from  the  former  would  ordinarily  be  applied  to  the  payment 
of  accounts,  making  accounts  payable  a  small  item.  As 
before  stated,  the  tendency  the  last  few  years  is  toward  car- 
rying open  accounts  rather  than  accepting  and  carrying 
notes  for  merchandise. 

Are  any  of  these  overdue?  Are  they  all  for  merchan- 
dise? Is  any  merchandise  in  stock  and  the  bill  not  included 
in  the  liabilities? 

Does  the  borrower  take  care  of  his  trade  obligations 
promptly  and  satisfactorily?  Generally  speaking,  a  concern 
that  is  large  enough  and  in  good  credit  enough  to  borrow 
through  a  commercial  paper  broker  should  be  discounting 
all  its  bills  in  the  trade,  and  should  not  be  asking  extension 
in  any  form  nor  show  a  large  amount  of  accounts  payable. 
There  should  be  no  excuse  for  them  to  issue  paper  to  trade 
creditors,  and  the  presence  of  bills  payable  to  trade  creditors 
is  a  sign  of  weakness  that  would  be  recognized  at  once.  You 
can  obtain  very  valuable  comment  and  criticism  from  people 
in  the  trade  who  have  either  sold  the  borrower  or  who,  per- 
haps, are  in  direct  competition  with  him. 

The  mortgage  debt  and  bonded  debt  are  termed  "capital 
liabilities'  and  together  with  current  liabilities  constitute  the 
total  liabilities  of  the  firm  or  corporation.  When  is  the 
mortgage  due?  What  is  the  rate  of  interest?  Is  it  paid 
regularly? 

*»F.  B.  Snyder  ante. 


456  THE    PRACTICAL  WORK  OF   A   BANK 

RATIO  OF  PLANT  TO  CAPITAL 

The  proper  ratio  of  working  capital  to  plant  is  another 
point  to  be  carefully  noted  in  the  analysis  of  a  borrower's 
statement.  In  general  it  may  be  said,  the  less  plant  invest- 
ment, the  better;  because  this  portion  of  the  capital  is  not 
being  turned  over  at  a  profit,  but,  on  the  contrary,  is  con- 
tinually depreciating,  and  is  a  constant  drain  upon  the  prof- 
its earned  by  the  circulating  capital.  While  this  is  the  gen- 
eral rule,  the  normal  ratio  of  plant  to  working  capital  varies 
greatly  in  the  different  lines  of  business.  In  a  jobbing  or 
retail  business  this  ratio  is  normally  very  small,  because  in 
the  former  only  a  small  amount  of  fixtures  is  required,  while 
in  the  latter  perhaps  a  larger  amount  of  fixtures,  but  no  ma- 
chinery, is  needed.  In  a  heavy  manufacturing  business  the 
plant  may  be  considered  fairly  normal,  if  it  does  nqt  exceed 
the  amount  of  a  year's  sales;  but  if  it  does  largely  exceed 
these  figures,  it  is  usually  found  to  contain  more  or  less  good 
will  or  water  in  its  valuation.24 

Having  a  statement  of  the  actual  assets  and  liabilities, 
it  becomes  important  to  know  the  contingent  liabilities,  for 
these  may  be  so  great  as  to  work  disaster  if  they  are  en- 
forced, as,  for  instance,  the  contingent  liability  on  an  in- 
dorsed note. 

Contingent  liabilities  is  one  of  the  most  important  items 
contained  in  the  statement — if  indeed  we  find  it  therein  at 
all.  Not  being  our  customer's  own  debts  he  may  be  back- 
ward in  disclosing  the  extent  to  which  he  has  endorsed  paper 
for  other  persons  or  firms.  Many  houses  have  been  ruined 
by  the  collapse  of  firms  for  whom  they  had  endorsed  much 
paper.  Again,  a  firm's  endorsement  may  be  put  upon  notes 
of  individual  members  of  the  firm;  a  very  dangerous  prac- 
tice and  one  which  the  credit  man  must  make  note  of.  All 
customer's  notes  discounted  at  the  bank  figure  under  this 
head.  While  the  proceeds  of  such  notes  are  carried  as  cash, 
still  they  bear  our  borrower's  endorsement,  and  he  would  be 
held  liable  for  their  payment. 

Any  firm  having  subsidiaries  should  be  carefully  investi- 
gated to  ascertain  the  relationship  that  exists.  In  the  Claflin 
failure  in  1914,  this  was  the  great  weakness,  the  unknown 

2«Oscar  Newfeng  ante. 


ESSENTIALS    IN    GRANTING    CREDIT  457 

liability.  It  had  received  notes  from  its  subsidiary  firms, 
and  sold  them  with  its  indorsement,  and  this  liability  was  not 
accurately  known.  And  by  reason  of  its  affiliations  it  car- 
ried down  prosperous  concerns  with  it,  and  the  interlocking 
interests  were,  so  complex  that  the  true  condition  of  the 
parent  concern,  as  well  as  the  affiliated  ones,  could  be  de- 
termined only  with  difficulty. 

NET  WORTH 

The  gradual  growth  of  the  net  worth  is  an  item  which  in- 
terests the  banker.  Unless  a  business  is  conducted  at  a 
profit,  it  has  but  little  excuse  for  existence  and  less  excuse 
as  a  credit  seeker.  If  the  business  is  successful,  but  the 
earnings  are  constantly  drawn  out,  the  management  is  neg- 
lecting to  create  a  buffer  against  hard  times.  It  may  also 
be  an  indication  of  high  living  at  the  expense  of  the  business, 
which,  in  the  end,  means  at  the  expense  of  the  creditors. 

DEPRECIATION 

A  constant  subject  of  debate  among  accountants  is  the 
proper  method  of  depreciating  equipment.  Modern  practice 
seems  to  favor  carrying  machinery  at  its  actual  or  cost  value, 
with  new  equipment  added  and  old  machinery  deducted,  and 
repairs,  of  course,  charged  to  expense,  while  the  actual  de- 
preciation is  accumulated  on  the  opposite  side  of  the  ledger, 
as  a  liability.  This  method  is  conceded  to  be  better  at  least 
for  insurance  purposes.  Real  estate  should  be  scaled  each 
year  to  bring  it  down  to  at  least  its  market  value. 

BANK  CONNECTIONS 

Has  the  borrower  adequate  bank  facilities?  This  is  a 
very  important  point,  because  if  a  borrower,  especially  in  a 
country  town,  has  his  borrowing  shut  off  through  brokers 
by  reason  of  financial  depression,  he  has  to  fall  back  on  his 
own  banks.  It  is  important  to  see,  therefore,  that  the  bor- 
rower has  enough  banks  and  enough  loaning  power  to  take 
care  of  his  total  requirements.  The  cleanest  proposition  is 
for  a  concern  to  have  one  or  more  banks  with  lines  of  credit 


468  THE   PRACTICAL  WORK   OF   A   BANK 

definitely  established  for  its  maximum  requirements  and  then 
to  put  out  its  paper  through  the  brokers  for  the  advantage 
of  lower  money  rates,  leaving  the  bank  lines  open. 

LIABILITIES  TO  CAPITAL 

The  relation  of  the  total  liability  to  the  capital  deserves 
attention.  As  a  general  rule  a  man  should  have  at  the  risk 
of  the  business  more  of  his  own  money  than  that  of  his  cred- 
itors. Again  we  meet  with  the  various  exceptions  to  any 
rule  in  credit  work.  The  exceptions  in  this  case  are  prac- 
tically the  same  as  those  in  the  "two  for  one"  quick  assets 
to  liabilities  rule.  The  working  capital  should  also  be 
compared  with  the  annual  sales,  bearing  in  mind  the  con- 
ditions of  the  particular  business  to  determine  whether  or 
not  the  concern  is  overtrading.  In  one  case  a  dry  goods 
company  turned  its  capital  3.36  times,  which  is  rather  low 
for  this  line. 

ACCRUED  ASSETS  AND  LIABILITIES 

In  the  statement  of  assets  and  liabilities,  it  is  but  fair 
that  any  accrued  but  uncollected  assets  such  as  interest, 
rent,  etc.,  be  considered  as  an  asset,  and  on  the  other  hand, 
the  business  must  be  charged  with  accruing  liabilities,  such 
as  taxes,  dividends,  and  other  accruing  charges  at  the  time 
the  audit  is  made. 

GOOD  WILL 

The  question  of  good  will  is  an  important  one,  and  one 
that  has  given  accountants  and  bankers  much  thought.  In 
some  companies  it  is  a  very  important  element,  and  is  car- 
ried as  a  nominal  asset;  while  in  others  it  is  a  very  large 
asset  and  of  questionable  value  in  the  amount  carried. 

Good  will  is  nothing  more  or  less  than  the  supposition 
that  trade  will  follow  an  established  course;  that  patrons 
will  continue  to  trade  at  the  old  stand.  The  good  will  of 
any  of  the  widely-advertised  products  is  difficult  to  deter- 
mine. Baker's  Cocoa  is  the  result  of  years  of  building  up  a 
trade;  Ivory  Soap  is  as  well  known  as  Uneeda  Biscuit;  and 
Sapolio  a  household  article. 


ESSENTIALS    IN    GRANTING    CREDIT  469 

Whether  any  product  could  crowd  these  out  of  their 
fields  is  doubtful,  so  long  as  the  quality  and  service  is  main- 
tained. And  to  capitalize  this  "tendency  of  trade  to  follow 
the  established  lines"  is  entirely  proper.  But  as  an  asset  for 
bank  loans,  it  depends  altogether  upon  what  the  good  will  is, 
how  long  established  and  the  field. 

INTEGRITY  OF  ORGANIZATION 

The  successful  continuance  of  a  business  depends  upon 
the  integrity  and  strength  of  its  organization,  as  well  as 
upon  the  integrity  of  character  in  its  management.  The 
principal  points  to  be  considered  in  judging  the  strength  of 
a  business  organization  are  its  safety  and  permanence,  har- 
mony among  the  managers,  and  experience  in  the  various 
branches  of  the  business,  manufacturing,  selling  and  finan- 
cing. A  large  business  which  is  dependent  for  its  continu- 
ance upon  a  single  individual  is  a  poorer  risk  than  one  which 
rests  in  the  hands  of  several  men.  The  sudden  death  or  dis- 
ability of  the  head  of  a  one-man  enterprise  may  seriously  em- 
barrass the  business  and  imperil  its  creditors — a  danger 
which  is  not  likely  to  occur  where  the  management  rests  with 
several  capable  men,  all  of  whom  will  rarely  be  disabled  at 
the  same  time. 

Harmony  among  the  officers,  directors  and  managers  of 
large  enterprise  is  essential  to  its  success.  When  a  banker's 
investigations  of  a  name  reveal  internal  dissensions  and  dis- 
cord, it  is  best  not  to  extend  credit.25 


THE  PASSING  OF  A  I  JO 


Having  an  application  for  a  loan,  or  a  piece  of  commer- 
cial paper  under  advisement,  it  becomes  the  duty  of  the 
credit  department  to  assemble  the  information  for  the  guid- 
ance of  those  who  will  pass  upon  the  application. 

Let  us  suppose  that  the  paper  of  Adams,  Jones  &  Com- 
pany is  offered.  We  know  nothing  about  them,  except  that 
it  is  offered  by  a  reliable  broker.  It  is  taken  under  ten-days' 
option,  in  the  sum  of  $25,000,  and  the  following  data  is 

26Qscar  Newfang  in  The  Bankers  Magazine. 


460 

assembled  by  the  credit  department  as  bearing  upon  that 
firm: 

FEBKUABT  1,  1915. 
ADAMS,  JONES  &  CO.,  WHOLESALE  GROCERS,  SMITHVILLE,  N.  Y. 

Purchase  of  $25,000  under  option,  January  28,  1915. 
Three  notes  of  $5,000.    Dated  January  20,  1915. 
One  note  of  $10,000.    Due  April  20,  1915. 

SUMMARY  OF  STATEMENT,  JANUARY  1,  1915. 

Cash   $20,000 

Accounts  receivable 100,000 

Merchandise   450,000 

Total  quick  assets — — $570,000 

Accounts  payable  $145,000 

Bills  payable  227,500 

•  372.500 


Surplus  quick  assets $197,500 

Real  estate  $100,000 

Sundries    40,000 

Net  worth   $337,500 

Sales $600,000 

Ratio  quick  assets  to  liabilities 1.53 

COMMENT  BY  CREDIT  MAN 

"The  ratio  of  quick  assets  to  liabilities  is  satisfactory  for 
a  grocery  house.  The  accounts  receivable  are  not  large  for 
a  firm  of  this  size,  being  one-sixth  the  annual  sales,  and  are, 
therefore,  equal  to  two  months'  sales,  but  should  be  reduced 
by  better  collection  methods.  The  accounts  payable  are  a 
trifle  too  large,  and  the  firm  has  borrowed  up  to  about  two- 
thirds  its  net  worth.  The  real  estate  is  an  old  building,  well 
located,  but  should  be  scaled  at  least  ten  per  cent,  from  these 
figures,  the  property  having  been  carried  at  these  figures 
for  ten  years,  and  property  in  that  neighborhood  has  not  in- 
creased in  value.  I  recommend  that  only  $5,000  be  taken." 

Then  follows  digests  of  letters  received  from  banks  that 
have  purchased  the  paper,  and  from  firms  having  had  deal- 
ings with  them,  somewhat  as  follows : 

BANK  A. 

1-31-15. 

Says  this  is  an  old  and  well  established  house,  having  account  with  it  for 
twenty  years;  never  overdrawn,  and  never  had  a  protest.  Offer  them  a  liberal 
line  which  is  never  fully  taken.  Borrow  occasionally  and  pay  promptly.  Take 
out  most  of  the  profits.;  men  live  modestly  but  well.  Are  not  given  to  extrava- 
gance, and  are  liberal  in  charities  and  public  matters.  Borrow  in  the  fall  but 
clean  up  in  the  early  spring.  We  buy  direct  of  them  and  in  the  open  market 
and  regard  them  as  highly  desirable. 


ESSENTIALS    IN    GRANTING    CREDIT  461 

BANK  B. 

1-S9-15. 

Have  bought  their  paper  steadily  when  offered  for  the  past  five  years.  Buy 
all  we  can  get.  Have  none  now.  Have  confidence  in  management,  and  regard 
them  well. 

FROM  THE  TRADE: 

FIRM  A. 

We  sell  these  people  all  their  coffee,  teas  and  spices.  Discount  all  their 
bills;  never  had  any  trouble;  buy  close  and  pay  promptly. 

The  agency  reports  would  be  somewhat  as  follows : 

COMMERCIAL  AGENCY. 

1-30-15. 

This  firm  started  in  business  in  1885  with  capital  of  $25,000.  Has  steadily 
made  money.  Profits  allowed  to  accumulate  in  early  years,  but  withdrawn  of 
late.  Business  now  profitable,  ably  managed,  but  subject  to  competition  of  a 
new  and  aggressive  firm  in  the  same  territory.  Partners  said  to  be  worth  quarter 
of  a  million  jointly,  stand  high  in  the  town  and  own  considerable  real  estate. 
Adams  and  Jones  the  only  members  of  the  firm. 

The  officer  looks  over  the  report  and  if  he  coincides  with 
the  views  of  the  credit  man,  returns  $20,000  of  the  paper 
with  a  request  for  another  offering. 

Where  the  application  is  from  a  depositor,  the  informa- 
tion will  be  largely  from  its  own  banking  experience,  as 
evidenced  by  the  average  balance,  average  indebtedness  and 
digest  of  statement  as  above. 

Many  institutions  do  not  require  their  credit  departments 
to  make  the  report  as  above  outlined.  The  offering  slip  is 
all  that  goes  before  the  discount  committee.  Under  a  head- 
ing "Remarks"  the  department  writes  the  result  of  its  in- 
vestigation and  recommendation.  However,  such  a  report  is 
a  good  thing.  It  condenses  the  information,  makes  it  readily 
available  for  future  reference,  and  is  evidence  that  the  loan 
has  been  given  thorough  attention,  and  does  not  have  to  be 
read  by  the  committee  if  it  is  satisfied  to  be  governed  by  the 
conclusion  of  the  department  as  contained  on  the  offering 
slip. 

When  the  loan  has  been  passed  on  by  the  discount  com- 
mittee, whether  authorized  or  not,  these  papers  are  returned 
to  the  credit  department,  and  become  part  of  its  records.  If 
another  loan  from  that  borrower  is  ever  under  consideration 
the  information  is  at  hand  for  reference. 


462  THE    PRACTICAL  WORK   OF   A   BANK 

WHAT  THE  CREDIT  MAN  WANTS  TO  KNOW 

Here  are  some  questions  that  suggest  the  line  of  informa- 
tion which  the  credit  man  likes  to  know  that  the  bare  state- 
ment does-  not  cover :  Is  the  business  legitimate,  and  is  it 
firmly  established?  If  a  manufacturing  establishment,  is  it 
one  catering  to  a  steady  demand,  or  to  some  whim?  (It  is 
easy  to  figure  out  that  if  there  are  ninety  million  people  in 
the  United  States,  and  if  one  out  of  every  ten  buys  an  arti- 
cle for  ten  cents  that  costs  nine,  what  the  profit  will  be.  It 
is  another  thing  to  persuade  that  one  to  buy.)  But  if  they 
all  eat,  it  is  fair  to  assume  that  if  you  make  something  they 
must  eat,  some  portion  of  the  ninety  million  will  buy  that 
product.  Beefsteak  never  goes  out  of  fashion.  Is  the  busi- 
ness a  monopoly,  or  is  it  subject  to  disastrous  competition? 
Is  the  business  well  located  and  well  served  by  transporta- 
tion facilities?  Can  it  operate  cheaply,  and  does  it?  Who 
are  the  owners  and  how  came  they  by  the  business?  Are 
they  trained  men  in  both  business  and  finance?  Can  they 
sell  as  well  as  make?  Are  they  well  balanced  both  in  the 
selling  and  in  the  technique?  Do  they  keep  proper  books  of 
account  so  that  their  financial  position  may  be  correctly 
ascertained?  Have  they  a  fair  idea  as  to  the  cost  of  opera- 
tion? Do  they  work  under  patents  and  are  the  patents  good 
and  still  in  force  ?  Is  there  litigation  pending  that  if  adverse 
will  prove  costly?  Do  they  carry  reserves  for  bad  debts  and 
depreciation? 

COMMERCIAL  PAPER 

Commercial  paper  as  commonly  known  may  be  defined  as 
consisting  of  those  instruments — notes  of  hand — which  are 
issued  by  firms  and  corporations  and  sold  through  the  me- 
dium of  commercial  paper  brokers  to  banks. 

Commercial  paper  is  issued  in  large  denominations, 
usually  $2,500,  $5,000  and  $10,000,  runs  from  three  to  six 
months,  the  purpose  being:  (a)  To  borrow  at  cheaper  rates 
than  would  be  obtainable  at  home;  (b)  to  have  wider  bor- 
rowing facilities;  (c)  to  keep  in  reserve  borrowing  accom- 
modations at  the  home  banks;  (d)  to  obtain  cash  with  which 
to  take  advantage  of  the  cash  discounts  offered  in  the  trades. 

Looking  at  it  from  the  banker's  viewpoint,  commercial 
paper  is  bought  for  the  purpose  of  (a)  investment,  when 


ESSENTIALS    IN    GRANTING    CREDIT  46S 

the  home  demand  is  slack;  (b)  to  have  a  wider  field  for  lend- 
ing, frequently  at  better  rates  than  home  conditions  war- 
rant; (c)  to  have  paper  maturing  constantly — a  stream  of 
maturities  which  he  is  under  no  obligation  to  renew. 

The  difference  between  commercial  paper  and  ordinary 
loans  and  discounts  is  the  fact  that  the  bank  has  no  interest 
in  the  commercial  paper,  aside  from  its  goodness,  and  is 
under  no  obligations  to  renew,  either  as  a  matter  of  protec- 
tion to  itself  or  as  a  favor  to  the  borrower. 

It  is  a  good  policy  for  a  concern  to  borrow  in  the  open 
market  and  reserve  its  home  banks  for  emergencies.  It  can 
often  obtain  better  rates  in  the  broad  market,  and  has  the 
home  bank  to  fall  back  upon  when  needed.  The  amounts 
due  to  home  banks  can  be  ascertained  by  communicating 
with  the  banks,  and  the  discount  line  can  be  known  by  ap- 
plication to  the  broker,  for  good  concerns  do  not  shop 
around,  but  confine  their  operations  to  one  or  two  houses, 
and  even  for  a  lesser  rate  would  stick  to  their  own  broker  as 
a  matter  of  good  policy. 

There  is  also  that  class  of  paper  consisting  of  notes  re- 
ceived in  trade  dealings,  which  are  indorsed  and  sold  through 
brokers,  and  this  class  is  known  as  "receivables,"  "two-name 
paper,"  "endorsed  paper,"  as  distinguished  from  the  first- 
mentioned  class  known  as  "single-name  paper."  The  great 
Claflin  firm  issued  its  paper  in  the  form  of  receivables.  Their 
debtors  would  pay  by  notes  running  to  the  firm,  which  the 
Claflin  firm  would  indorse  and  sell  in  the  market,  this  paper 
being  known  as  "Claflin  Receivables,"  and  was  highly 
regarded. 

Single-name  paper,  while  issued  for  the  purpose  of  con- 
summating a  trade  transaction,  has  no  evidence  that  it  will 
be  used  for  such  purpose.  The  firm  ostensibly  borrows  to 
take  its  discounts,  and  only  by  communicating  with  the 
firm's  trade  connections  can  this  be  ascertained;  while  in 
two-name  paper  there  is  evidence  of  a  trade  on  the  face, 
subject,  of  course,  to  accommodation  notes  and  other  irreg- 
ularities possible  in  mercantile  dealings.  The  broker,  by 
knowing  the  demand  and  supply  of  paper,  is  able  to  regu- 
late the  market  to  a  considerable  extent.  In  some  places 
money  may  be  in  surplus,  while  in  others  there  will  be  a 
dearth,  and  by  knowing  the  market  conditions,  he  can  buy 


4.64  THE    PRACTICAL  WORK  OF   A   BANK 

where  money  is  needed  and  sell   where  investments   are 
wanted. 

COMMERCIAL  PAPER  AS  LIQUID  RESERVES 

Banks  have  seasonal  demands.  They  cannot  accumulate 
money  all  through  the  summer  and  keep  it  idle  awaiting  the 
fall  demand,  for  this  is  not  good  banking;  they,  therefore, 
buy  commercial  paper  in  the  spring  and  early  summer  that 
matures  about  the  first  of  September,  when  the  local  de- 
mand begins  to  show  itself,  and  by  allowing  paper  pur- 
chased in  the  open  market  to  mature,  they  have  funds  in 
hand  with  which  to  take  care  of  their  home  borrowers. 

The  custom  of  buying  paper  in  the  market  has  not  long 
obtained,  it  being  formerly  considered  unfair  to  the  commu- 
nity to  take  funds  outside  the  territory;  but  as  the  advan- 
tages of  commercial  paper  as  a  secondary  reserve  have  be- 
come apparent  and  with  money  accumulating  in  banks  fast- 
er than  home  demand  could  utilize,  the  custom  has  been 
growing  all  over  the  country. 

Bonds  were  formerly  regarded  as  the  bank's  secondary 
reserve ;  but  the  difficulty  of  these  is,  the  maturity  is  not  easy 
to  regulate,  there  not  being  a  supply  of  short-time  bonds 
always  available.  And  if  longer- time  bonds  are  bought  there 
is  no  assurance  that  they  can  be  sold  at  the  time  of  need  for 
their  purchase  price.  Sometimes  they  cannot  be  sold  at  all, 
and  the  rates  are,  as  a  rule,  lower  than  commercial  paper 
will  bring. 

THE  CASH  DISCOUNT  SYSTEM 

The  cash  discount  system  is  an  outgrowth  of  the  Civil 
War.  At  that  time  and  before,  it  was  the  custom  of  a  mer- 
chant to  buy  heavily  at  periodical  times,  making  annual  or 
semi-annual  trips  to  the  large  city  and  there  select  his  stock 
for  six  months  or  more.  He  gave  his  note,  or  paid  upon  his 
next  visit.  He  was  well  known  to  his  jobber  and  needed  no 
other  credit  than  his  reputation  and  standing. 

But  after  the  war,  especially  in  the  greenback  disturb- 
ances, conditions  began  to  change.  As  the  value  of  money 
became  problematical,  the  amount  the  creditor  would  get  at 
maturity  became  uncertain.  He  was  willing  to  make  a  con- 
cession for  prompt  payment.  He,  therefore,  sold  on 


ESSENTIALS    IN    GRANTING    CREDIT  465 

"terms,"  payment  to  be  made  by  a  certain  time,  less  a  dis- 
count if  paid  before  that  time.  This  system  has  grown  to 
be  exceedingly  popular,  and  the  old  method  of  settling  by 
note  has  disappeared  to  a  large  extent.  Only  in  a  few  lines, 
such  as  in  lumber,  agricultural  machinery,  etc.,  is  the  prom- 
issory note  now  used  in  any  great  volume.  And  as  the  cash 
discount  custom  has  grown,  single-name  paper  has  come  into 
wide  usage  as  a  method  of  borrowing,  the  proceeds  being 
used  to  pay  cash  for  purchases.  Instead  of  the  merchant 
giving  his  debtor  his  note  he  now  gives  him  his  check,  and 
obtains  the  funds  to  make  his  check  good  from  selling  his 
paper  in  the  market. 

It  is  highly  profitable  for  the  merchant  to  take  his  dis- 
counts, as  a  simple  illustration  will  show.  Suppose  the 
terms  are  2/10 — net  30;  meaning  that  if  payment  is  made 
within  ten  days  from  date  of  the  invoice,  two  per  cent,  may 
be  deducted.  This  is  equivalent  to  seventy-two  per  cent,  a 
year,  meaning  to  say  that  if  money  were  to  be  made  at  this 
rate,  it  would  have  to  earn  seventy-two  per  cent,  a  year. 
,  Let  us  prove  the  point.  A  merchant  buys  a  bill  of  goods 
for  $100  payable  as  above.  If  he  pays  it  within  the  period 
he  may  settle  for  $98.  If  he  were  to  require  the  $100  to 
earn  $2  for  him  in  ten  days  at  interest,  he  would  have  to 
employ  it  at  the  rate  of  seventy-two  per  cent,  a  year;  for 
interest  on  $100  at  seventy- two  per  cent,  for  the  year  equals 
$72 — $6  a  month,  and  $2  for  one-third  of  a  month. 

On  the  other  hand,  the  seller  could  not  make  the  $2  in  so 
short  a  time  except  by  the  employment  of  the  principal  at 
the  rate  of  seventy-two  per  cent,  a  year.  Therefore,  he  has 
lost  at  that  rate.  But  he  has  doubtless  concluded  from  ex- 
perience that  his  discounts  will  be  taken  and,  therefore,  fixed 
$98  as  the  selling  price  of  the  article,  out  of  which  he  gets  his 
anticipated  profits;  and  if  the  discounts  are  not  taken,  he  is 
the  gainer — except  he  has  a  poor  credit  risk  to  deal  with. 
He  could  just  as  well  make  the  selling  price  any  arbitrary 
figure  and  allow  more  liberal  discounts,  but  the  above  illus- 
trates the  point  in  mind. 

WHAT  IT  COSTS  A  RETAILER  NOT  TO  GET  CASH  DISCOUNTS 

In  order  to  show  retailers  the  high  price  they  pay  for  the 
privilege  of  taking  full  time  on  their  invoices,  H.  M.  Gary 

81 


466  THE   PRACTICAL  WORK  OF   A  BANK 

of  the  Theodore  Poehler  Mercantile  Company,  Emporia, 
Kansas,  has  drawn  up  a  table  of  interest  equivalents  of  a 
few  cash  discounts.  It  is  presented  in  the  May  bulletin  of 
the  National  Association  of  Credit  Men. 

According  to  Mr.  Gary's  table,  one  per  cent,  in  ten  days 
in  a  thirty-day  bill  means  eighteen  per  cent,  per  annum.  He 
gives  this  example:  Invoice,  $1,000,  thirty  days  net,  one  per 
cent,  for  cash  in  ten  days.  If  the  merchant  pays  in  ten  days 
he  receives  $10  cash  discount  which,  in  effect,  is  the  interest 
the  wholesale  house  pays  him  for  the  use  of  $1,000  for  the 
twenty  days'  unexpired  time.  This  is  at  the  rate  of  eighteen 
per  cent,  per  annum,  for  the  interest  on  $1,000  for  twenty 
days  at  eighteen  per  cent,  is  $10.  Other  examples  are  given 
as  follows: 


Invoice  $1,000,  terms  sixty  days  net,  2  per  cent,  for  cash  in  ten  days ;  discount 
$20,  unexpired  time  50  days,  interest  equivalent,  14  4-10  per  cent,  per  annum. 

Invoice  $1,000,  terms  six  months  net,  6  per  cent,  for  cash  in  thirty  days; 
discount  $60,  unexpired  time  five  months,  interest  equivalent,  14  4-10  per  cent, 
per  annum. 

Invoice  $1,000,  terms  four  months  net,  4  per  cent,  for  cash  in  thirty  days; 
discount  $40,  unexpired  time  three  months,  interest  equivalent,  16  per  cent, 
per  annum. 

Invoice  $1,000,  terms  six  months  net,  6  per  cent,  for  cash  in  sixty  days; 
discount  $60,  unexpired  time  four  months  net,  6  per  cent,  for  cash  in  sixty  days; 
discount  $60,  unexpired  time  four  months,  interest  equivalent,  18  per  cent,  per 
annum. 

Commenting  on  the  table  the  bulletin  says:  "The  above 
few  examples  will  show  what  a  heavy  disadvantage  the  re- 
tailer works  against  when  he  takes  full  time  on  his  bills. 
He  could  borrow  money  to  discount  his  purchases  and  make 
six  per  cent,  to  ten  per  cent,  on  the  transaction,  besides  keep- 
ing his  business  in  hand  better  than  he  possibly  can  when 
he  owes  a  large  number  of  wholesale  houses." 

COMMERCIAL  PAPER  AND  THE  FEDERAL  RESERVE  BANKS 

The  ostensible  purpose  of  single-name  paper  is  to  take 
advantage  of  these  cash  discounts,  and  all  well-managed  con- 
cerns endeavor  to  do  so,  and  failure  is  indicative  of  trouble. 
It  is  profitable  as  has  been  shown,  and  money  cannot  be 
made  easier  than  by  taking  these  concessions.  The  danger 
lies  in  the  unscrupulous  paper  broker,  who  urges  his  client  to 
put  out  more  paper  than  is  necessary  for  the  business,  in 
order  to  take  advantage  of  a  cheap  market,  and  this  leads 
to  overtrading  and  over-extension. 


ESSENTIALS    IN    GRANTING    CREDIT  467 

The  enactment  of  the  Federal  Reserve  Law,  which  had 
for  one  of  its  primary  purposes  the  rediscount  of  commer- 
cial paper,  led  to  a  widespread  interest  in  this  subject, 
and  a  division  of  opinion  as  to  the  relative  merits  of  each 
class  of  paper,  single-name  and  two-name,  the  latter  called 
receivables.  The  latter  form  of  paper  more  nearly  resembles 
the  "acceptance"  in  use  in  Europe,  since  it  carries  a  double 
obligation,  which  single-name  paper  does  not. 

The  definition  of  paper  that  would  be  acceptable  to  the 
Federal  Reserve  Banks  was  awaited  with  uncommon  inter- 
est on  the  part  of  the  banking  fraternity.  It  affected  every 
bank  that  expected  to  rediscount.  It  affected  business  in 
the  discrimination  that  would  be  made  against  either  class. 
It  had  in  it  the  possibility  of  revolutionizing  American  busi- 
ness methods.  It  had  danger. 

Clearing-houses  and  bankers  had  been  appealed  to,  to 
suggest  what  kind  of  paper  should  be  selected.  Views  in- 
numerable were  advanced,  for  and  against  both  kinds,  but 
one  thing  was  agreed  upon,  and  that  was,  in  accord  with 
the  intent  of  the  Federal  Reserve  Act,  the  paper  should 
arise  out  of  a  business  transaction — an  exchange  of  com- 
modities. 

Just  how  this  was  to  be  ascertained  was  the  problem. 
Some  clearing-houses  favored  a  statement  on  the  paper  that 
it  was  for  such  a  purpose,  but  the  question  of  negotiability 
arose.  Others  made  it  a  part  of  the  bank's  business  to  as- 
certain this  and  to  certify  to  it.  But  on  the  tenth  of  No- 
vember, 1914,  the  Federal  Board  issued  its  definition  and 
description  of  the  paper  it  would  receive  for  rediscount.  No 
doubt  the  war  conditions  had  much  to  do  with  the  liberal 
definition,  and  it  was  probably  framed  in  the  light  of  pres- 
ent events. 

The  board  lays  down  the  basic  rule  that  the  paper  should 
arise  from  a  commercial  transaction.  It  should  be  self- 
liquidating.  It  should,  as  the  board  puts  it,  "represent  in 
every  case  some  distinct  step  in  the  productive  or  distribu- 
tive process- -the  progression  of  the  goods  from  the  pro- 
ducer to  the  consumer.  The  more  nearly  these  steps  ap- 
proach the  final  consumer,  the  smaller  will  be  the  amount 
involved  in  each  transaction  as  represented  by  the  bill,  and 
the  more  automatically  self-liquidating  will  be  its  character." 

But  before  treating  the  subject  of  the  board's  ruling,  let 


*68  THE   PRACTICAL  WORK  OF   A   BANK 

us  review  the  advantages  and  disadvantages  of  each  class  of 
paper. 

In  the  single-name  paper,  economy  of  effort  is  realized. 
It  comes  in  large  and  uniform  denominations.  Take  a  typ- 
ical case.  Here  is  a  merchant,  let  us  say,  with  $300,000  of 
debts,  representing  3,000  invoices.  He  borrows  $300,000 
on  sixty  $5,000  notes  and  pays  by  check.  If  he  were  to  give 
his  creditors  his  notes  of  hand — two-name  paper — he  would 
issue  3,000  separate  pieces  of  paper,  have  to  record  their 
details  and  arrange  to  meet  them  when  due. 

His  bookkeeping  would  be  much  congested  by  such  a 
process,  and  so  would  the  systems  of  all  who  handled  the 
paper,  particularly  the  banks. 

As  before  suggested,  single-name  paper  is  a  development 
arising  out  of  the  desire  of  traders  to  shorten  the  time  of 
settlement,  and  in  order  to  do  so,  concessions  are  given  if 
payment  is  made  before  a  certain  date.  It  has  placed  the 
country  on  practically  a  cash  basis.  It  has  shortened  the 
term  of  credit.  Moreover,  the  customs  have  become  so  firm- 
ly ingrained  upon  the  business  interests  of  the  country  that 
to  change  them  would  be  quite  impossible. 

The  safety  of  single-name  paper  is  largely  assured  (a) 
by  the  standing  of  the  broker,  who  is  supposed  to  make  care- 
ful study  of  the  risk  for  his  own  sake  and  to  handle  only 
high-grade  paper.  He  should  have  an  audit,  and  a  state- 
ment, as  a  protective  measure.  He  has  a  reputation  to 
sustain,  (b)  By  analysis  of  the  statement  and  correspond- 
ence with  banks  that  have  handled  the  paper. 

The  losses  have  been  trifling  in  those  banks  where  single- 
name  paper  has  been  favored — so  small  as  to  be  inconsequen- 
tial. While  the  losses  in  single-name  paper  have  not  been 
large,  there  have  been,  however,  failures  which  have  been 
serious  in  this  respect,  notably  the  failure  of  the  Westing- 
house  Company  and  the  Pillsbury  Flour  Company  a  few 
years  ago.  The  possible  losses  from  single-name  paper  are 
classified  by  Mr.  Owen  Shepherd  of  the  International  Paper 
Company  as  follows: 

1.     Dishonesty  on  the  part  of  the  broker. 

(a)  In  selling  forged  paper  (This  is  a  rare  occurrence)  ; 
(b)  in  putting  out  paper  of  known  bad  concerns;  (c) 
through  collusion  with  those  who  desire  to  issue  paper  dis- 
honestly. 


ESSENTIALS    IN    GRANTING    CREDIT  469 

2.  Inability  on  the  part  of  the  broker. 

(a)  In  being  misled  as  to  his  client's  standing;  (b)  in 
engaging  his  customers  to  issue  more  paper  than  they  are 
justified  in  doing;  (c)  by  accepting  improperly  authorized 
paper. 

3.  Dishonesty  on  the  part  of  the  maker. 

(a)  Through  false  statements;  (b)  through  flotation  of 
paper  not  properly  recorded;  (c)  through  manipulation  of 
the  books,  keeping  duplicate  sets,  or  by  other  means  pre- 
venting public  auditors  from  ascertaining  full  knowledge 
of  the  indebtedness  of  the  maker. 

4.  Inability  of  the  maker. 

(a)  By  undertaking  larger  business  than  his  capital  war- 
rants; (b)  through  over-expansion  due  to  a  desire  to  specu- 
late in  his  business  by  overbuying  for  a  prospective  rise  in 
prices  or  otherwise. 

5.  General  over-expansion  in  many  lines  which  might 
lead  to  panic  and  financial  ruin. 

6.  Failure    due    to    apparently    unavoidable    circum- 
stances. 

TWO-NAME  PAPER 

While  single-name  paper  is  for  the  purpose  of  liqui- 
dating an  account  receivable,  two-name  paper  is  the  embodi- 
ment of  the  account  receivable.  It  settles  a  debt.  It  is 
drawn  in  odd  amounts  and  bears  prima  facie  evidence  of  its 
purpose.  It  may,  of  course,  be  "kited" — one  firm  giving  its 
note  in  exchange  for  that  of  another,  but  collusion  is  possible 
in  all  business  dealings. 

Inasmuch  as  *  'receivables"  carry  the  strength  of  two 
names,  and  have  evidence  of  the  trade  transaction  out  of 
which  they  arose  on  their  face,  they  are  most  desirable.  But 
these  instruments  are  not  so  readily  obtained  as  the  single- 
name  paper,  the  latter,  according  to  commercial  paper  men, 
predominating  to  the  extent  of  fully  ninety  per  cent.  The 
endorsement  of  the  payee  not  only  authenticates  the  note, 
but  adds  strength  to  it. 

The  Federal  Reserve  Board  indicates  its  leaning  to  two- 
name  paper  when  it  says:  "Double-name  paper  drawn  on  a 
purchaser  against  an  actual  sale  of  goods  affords  from  the 
economic  standpoint  of  view,  prima  facie  evidence  of  the 
character  of  the  transaction  from  which  it  arose.  Single- 


470  THE   PRACTICAL  WORK   OF   A   BANK 

name  notes,  now  so  freely  used  in  the  United  States,  may 
represent  the  same  kind  of  transactions  as  those  bearing  two 
names.  Inasmuch  as  the  single-name  paper  does  not  show 
on  its  face  the  character  of  the  transaction  out  of  which  it 
arose — an  admitted  weakness  of  this  form  of  paper — it  is 
incumbent  upon  each  Federal  Reserve  Bank  to  insist  that 
the  character  of  the  business  and  the  general  status  of  the 
concern  supplying  such  paper  should  be  carefully  examined 
in  order  that  the  discounting  bank  may  be  certain  that  no 
such  single-named  paper  has  been  issued  for  purposes  ex- 
cluded by  the  act,  such  as  investments  of  a  permanent 
nature." 

The  open  account  selling,  which  is  a  development  of  the 
single-name  paper,  makes  possible  a  postponement  of  pay- 
ment, the  obligation  of  the  open  account  being  easier  to  de- 
lay in  its  payment  than  a  negotiable  instrument.  The  as- 
signment of  the  book  accounts — the  most  liquid  asset  of  the 
firm  next  to  cash — is  also  possible,  and,  if  so,  the  issue  of 
single-name  paper  makes  a  weakened  state  of  affairs.  Bor- 
rowers have  been  known  to  have  borrowing  accounts  in 
twenty-nine  institutions  in  New  York  State  and  others  have 
borrowed  in  thiily  different  names. 

There  is  this  to  be  said,  however,  that  in  liquidating  two- 
name  paper  it  is  more  difficult  to  renew  a  note  than  to  issue 
paper  in  the  market.  If  the  seller  will  not  give  an  extension, 
the  extended  two-name  paper  cannot  arise.  It  must  be  paid 
if  not  extended,  or  some  other  lender  found  who  will  take 
it,  unless  the  paper  is  to  be  sold  through  the  brokers  and 
thus  have  the  open  market  as  the  field.  Single-name  paper 
is  never  given  to  the  seller — he  gets  the  proceeds  in  form 
of  a  check — for  to  issue  to  him  single-name  paper  would 
make  it  double  name  when  negotiated. 

Paper  that  is  paid  by  the  issue  of  other  paper  is  un- 
sound. It  should  be  paid  from  the  proceeds  of  the  mer- 
chandise which  it  carried.  It  should  liquidate  itself.  Fixed 
loans  should  not  be  financed  from  the  proceeds  of  marketed 
paper.  The  endeavor  of  the  Federal  Reserve  Board  has 
been  to  eliminate  this  risk.  And  if  several  brokers  are  em- 
ployed by  the  same  firm,  there  is  no  effective  check  on  the 
amount  of  paper  issued. 

In  a  brief  filed  with  the  Federal  Reserve  Board  by  the 


ESSENTIALS    IN    GRANTING    CREDIT  471 

Merchants  Association  of  New  York  concerning  the  quality 
of  paper  eligible  for  rediscount,  it  was  said: 

"All  negotiable  commercial  paper  is  of  one  of  two  classes: 
(a)  bills  of  exchange,  or  orders  to  pay  money,  and  (b) 
promissory  notes,  or  promises  to  pay  money.  The  two 
classes  may  be  further  distinguished  by  the  time  of  pay- 
ment, which  is  either  on  demand  or  at  some  fixed  future 
date.  Checks  and  sight  drafts  are  demand  bills  of  exchange, 
differing  only  in  form.  A  bank  note  is  a  demand  promis- 
sory note.  The  questions  of  credit  involved  in  these  forms 
of  commercial  paper  do  not  involve  a  postponement  of  pay- 
ment, and  so  far  as  our  banks  are  concerned  no  action  of  the 
Federal  Reserve  Board  seems  to  be  needed  to  work  any 
changes  in  the  customs  surrounding  their  use,  which  ade- 
quately protect  all  temporary  holders  from  loss  by  their 
acceptance. 

Unsecured  promissory  notes  bearing  interest,  and  pay- 
able "on  demand,"  while  purporting  to  be  call  loans  on  per- 
sonal security,  are  for  the  most  part  loans  repayable  at  the 
pleasure  of  the  borrower.  Collateral  notes  payable  at  a 
fixed  date  or  on  demand,  and  secured  by  Government  bonds 
or  notes,  are  expressly  relieved  from  the  prohibition  against 
notes  based  on  a  pledge  of  investment  securities  and  their 
quality  with  respect  to  ultimate  payment  is  well  established. 

There  remain  to  be  considered,  therefore,  only  those  va- 
rieties of  time  paper  based  on  personal  credit  or  on  merchan- 
dise. These  are: 

1.  The  bill  of  exchange  payable  at  a  specific  date  after 
sight,  and  accepted  by  the  drawee — one  variety  of  bills  of  ex- 
change.   It  may  be  secured  by  bill  of  lading  for  merchandise 
which  may  be  released  or  not  released  to  the  drawee  upon 
acceptance. 

2.  The  promissory  note  in  settlement  of  sales — endorsed 
by  the  seller. 

3.  A  note  or  draft  endorsed  for  accommodation. 

4.  The   promissory  note  secured  by  pledge   of  mer- 
chandise. 

5.  The     unendorsed     promissory     note — single-name 
paper. 

1.  Bills  of  exchange  drawn  for  acceptance  at  thirty 
days  to  six  months'  sight  either  with  or  without  bills  of  lad- 
ing for  the  merchandise  attached,  are  now  rarely  used  in  the 


472  THE    PRACTICAL  WORK  OF   A   BANK 

inland  trade.  They  would  be  applicable  to  transactions  in 
the  great  staples  such  as  cotton,  wheat,  corn,  oats,  and  other 
agricultural  products.  But  transactions  in  these  staples 
have  been  freed  by  the  produce  exchanges  from  time  credits, 
and  are  now  very  generally  on  a  cash  basis.  Were  there  a 
supply  of  this  class  of  paper  it  would  doubtless  form  one  of 
the  safest  as  well  as  fluid  forms  of  investment  for  Fed- 
eral Reserve  discounts.  Bills  of  exchange,  based  on  sale 
transactions,  are  normally  self-liquidating. 

In  connection  with  manufactured  commodities  such  as 
dry  goods,  groceries,  hardware  and  the  like,  bills  of  exchange 
became  obsolete  many  years  ago  owing  to  a  variety  of  causes 
which  may  be  here  summarized,  viz. : 

(a)  '  The  reduction  of  the  customary  term  of  credit  from 
six  or  eight  months  to  ten,  thirty  or  sixty  days. 

(b)  Uncertainty  of  the  amount  due  by  reason  of  dis- 
counts offered  for  prepayment,  by  which  the  term  of  credit 
is  made  flexible,  at  the  buyer's  option.    The  general  effect  of 
this  process  is  that  all  houses  in  high  standing  finance  them- 
selves so  as  to  pay  cash  for  all  their  purchases. 

(c)  Uncertainty  as  to  the  amount  to  be  paid  owing  to 
the  substitution  of  implied  warranties  of  the  goods  sold  in 
place  of  the  old  rule  of  caveat  emptor. 

(d)  The  change  in  the  custom  of  buying,  made  possible 
by  improvements  in  transportation  during  the  last  thirty 
years,  whereby  instead  of  making  a  few  large  shipments  of 
merchandise,  buyers  now  make  a  large  number  of  small  pur- 
chases.   While  the  average  size  of  the  bills  in  the  sales  of 
large  wholesale  houses  in  the  seventies  was  over  $1,000,  it  is 
now  less  than  $100.    It  is  not  practicable  to  settle  accounts 
of  such  small  size  with  bills  of  exchange.      (See  appendix, 
page  477.) 

(e)  The  facilities  extended  to  the  country  merchant  by 
local  banks,  which  have  everywhere  multiplied.    These  banks 
find  a  profitable  use  for  their  funds  in  making  loans  to  local 
merchants  who  are  thus  enabled  to  buy  merchandise  advan- 
tageously on  the  shorter  terms  now  prevalent,  and  to  avoid 
the  long  credits  which  in  former  days  were  furnished  by  the 
seller  of  the  goods  and  paid  for  in  the  price.     Credit  prices 
are  always  higher  than  cash  prices. 

For  these  reasons  the  bill  of  exchange  has  become  obso- 
lete in  nearly  all  branches  of  trade  in  manufactured  goods, 


ESSENTIALS    IN    GRANTING    CREDIT  478 

except  where  the  conditions  above  referred  to  are  upset  by 
forced  trade  sales  at  auction.  In  this  case,  notes  or  bills  are 
given  in  payment  mostly  by  second  and  third-rate  debtors, 
all  others  preferring,  in  ordinary  times,  to  settle  on  short 
time  with  cash. 

2.  What  is  true  of  the  use  of  bills  of  exchange  is  also 
true  of  the  use  of  promissory  notes  in  settlement  of  trading 
accounts  receivable,  and  for  the  same  reasons.    At  present 
such  promissory  notes  as  are  given  for  merchandise  accounts 
are  quite  well  understood  to  represent  settlements  of  over- 
due accounts  receivable  or  extensions  granted  to  weak  debt- 
ors; strong  houses  hesitate  to  endorse  and  sell  these  notes 
knowing  that  they  are  the  least  liquid  of  all  their  receivables ; 
and  that  a  transaction  of  this  kind,  disclosed,  will  besmirch 
their  own  credit.    By  average  from  one-quarter  to  one-third 
of  such  notes  go  to  protest  and  are  paid  by  the  endorser. 

Promissory  notes,  however,  are  given  by  consumers  in 
large  volume  in  part  settlement  of  debts  for  farm  machinery, 
automobiles,  wagons,  tools,  etc.  A  large  part  of  these  notes 
are  very  good;  but  being  drawn  by  persons  of  meagre  bank 
credit,  and  not  under  the  influence  of  business  habits,  are  not 
always  paid  promptly  at  their  maturity.  Such  notes  are  fre- 
quently endorsed  and  used  as  collateral  for  the  promissory 
notes  of  their  holders.  They  give  a  self -liquidating  character 
to  the  notes  which  they  support,  and  should  be  excellent  col- 
lateral security  when  protected  by  sufficient  margins  to  fore- 
fend  the  average  percentage  of  default.  They  would  seem 
to  fall  within  the  compass  of  the  broad  definition  of  the 
second  paragraph  of  section  thirteen. 

3.  Promissory  notes  endorsed  by  sureties  for  accommo- 
dation form  the  great  bulk  of  the  double-named  paper  held 
by  our  banks.    Such  accommodation  paper  is  good  provided 
it  is  not  used  as  a  means  of  financing  the  inactive  assets  of 
both  maker  and  endorser.    It  does  not  represent  a  real  trans- 
action between  them.    As  a  means  of  providing  capital  at  the 
start  for  able  men  of  limited  means  it  is  a  device  of  value. 
Notes  of  such  men  are  dependent  in  a  much  larger  degree 
than  any  other  kind  of  paper  upon  the  character  and  ability 
of  the  maker.    He  gets  the  endorsement  because  he  needs  the 
third  element  of  good  credit — capital.    The  valid  foundation 
for  the  prejudice  against  accommodation  endorsement  is  not 
the  fact  that  usually  a  note  so  endorsed  represents  a  future 


474  THE    PRACTICAL   WORK   OF   A   BANK 

rather  than  a  past  transaction;  for  a  past  transaction  is  just 
as  likely  to  be  foolish,  and,  therefore,  not  to  pay  the  note,  as 
a  future  transaction.  But  they  are  clouded  by  the  question 
of  the  quid  pro  quo  given  to  the  accommodating  endorser. 
If  a  reciprocal  endorsement  is  given  in  return,  and  secretly, 
there  is  the  certainty  of  inflation  by  the  production  of  two 
notes  where  one  only  is  needed  by  trade  demands.  They 
are  connected  in  the  lender's  mind  with  the  practice,  of 
dubious  morality,  of  not  acknowledging  the  endorsements  as 
liabilities,  until  the  maker  has  defaulted.  Nobody  likes  to 
lend  money  on  mysteries. 

When  the  endorsement  is  that  of  a  concern  affiliated  by 
common  ownership,  it  adds  nothing  to  the  responsibility  be- 
hind the  note,  but  may  mislead  the  uninformed.  •  It  is  only 
where  an  endorsement  or  acceptance  is  from  a  party  thor- 
oughly independent  of  the  maker  that  it  is  of  any  value; 
and  in  such  case  the  nature  of  the  consideration  should  be 
disclosed  in  order  to  forefend  distrust.  The  safety  of  such 
bills  depends  entirely  upon  an  intimate  knowledge  possessed 
by  the  discounting  bank  of  the  character,  ability  and  means 
of  both  parties  to  the  transaction,  and  they  are,  therefore, 
unfitted  for  open  market  transactions.  And  when  made  on 
a  large  scale,  as  in  a  recent  deplorable  instance,  they  are  a 
distinct  menace  to  financial  weal.  They  are  in  no  sense 
self-liquidating. 

4.  Promissory  notes  secured  by  merchandise  are  men- 
tioned specifically  in  the  latter  part  of  this  section  of  the  act. 
Unsold  merchandise  is  of  undeterminate  value,  and  a  note 
based  upon  it  is  no  more  self -liquidating  than  the  merchan- 
dise itself.    Like  all  other  speculative  notes  they  require  a 
continual  scrutiny  of  the  markets  for  the  merchandise  by 
which  they  are  secured.    Such  notes  are  often  given  by  man- 
ufacturers for  purchases  of  raw  materials,  in  which  case  they 
are  generally  paid  off  when  the  raw  material  is  drawn  from 
warehouses  and  used  in  production.    Notes  secured  by  mer- 
chandise are  not  self-liquidating,  as  they  require  the  effort 
of  selling  to  provide  the  funds  wherewith  to  pay. 

5.  Single-name  paper.    Our  modern  American  methods 
of  cash  or  short  maturity  transactions,  modified  to  a  degree 
by  customs  of  delivery  of  certain  classes  of  merchandise  in 
advance  of  the  selling  season,  give  rise  to  vast  amounts  of 
book  accounts  receivable,  payable  at  fixed  dates,  but  subject 


ESSENTIALS    IN    GRANTING    CREDIT  476 

to  the  indeterminate  influences  of  flexible  terms  of  credit  and 
of  implied  warranties,  the  two  collectively  producing  a  mean 
variation  of  between  two  and  three  per  cent.  These  being 
incapable  of  the  certainty  prerequisite  to  note  settlement, 
it  has  become  the  custom  of  the  wholesaler  to  obtain  capital 
for  further  operations  through  the  sale  on  the  open  mar- 
ket of  his  plain  promissory  note  for  a  round  amount,  ad- 
justing its  maturity  to  that  of  his  book  accounts  receivable, 
so  as  to  give  a  self -liquidating  quality  to  his  own  notes. 

In  its  current  form  it  represents  a  past  transaction  just 
as  much,  if  not  so  specifically,  as  a  bill  of  exchange.  Such 
paper  has  always  been  in  demand  from  bankers  and  in  times 
of  trouble  the  self-liquidating  quality  transmitted  from  the 
book  accounts  behind  it  has  made  its  recurrent  maturities  the 
chief  cash  reliance  of  the  banks,  taking  the  place  of  the  se- 
cured call  loans  which,  theoretically  liquidable  on  demand, 
are  at  such  times  congealed  by  the  stoppage  of  markets,  and 
unsalability  of  collaterals.  No  moratorium  has  ever  been 
demanded  for  the  single-name  promissory  note,  even  when 
the  banks  generally  have  failed  in  their  obligation  to  pay 
cash  to  their  depositors,  or  gold  to  their  note-holders;  nor 
even  when  its  makers  may  have  asked  for  delay  in  the  settle- 
ment of  their  book  accounts  payable.  Such  notes  can  be  put 
in  the  status  of  two-name  paper  only  by  accommodation 
endorsement. 

If  required  by  law,  or  by  regulation  of  the  board,  two  or 
three-name  paper  will  be  manufactured  to  order.  It  will 
then  represent  the  obligation  of  the  less  scrupulous  of  trad- 
ers, and  will  be  subject  when  made  in  a  large  way  to  the  dis- 
advantages adherent  to  accommodation  endorsement  for  pur- 
poses of  finance. 

But  it  is  clear,  from  the  nature  of  the  mercantile  prom- 
issory note,  endorsed  or  unendorsed,  that  it  is  either  issued 
or  drawn  for  "commercial  purposes  or  the  proceeds  of  which 
have  been  used  or  are  to  be  used  for  such  purposes,"  and  so 
within  the  inclusions  of  the  act. 

DISCOUNT  MARKET 

The  value  to  our  business  as  well  as  to  our  finance  of  an 
open  discount  market,  such  as  prevails  abroad,  and  of  an 
entrance  into  the  international  discount  market,  is  not  to  be 
underrated,  even  though  the  immediate  importance  of  the 


476  THE    PRACTICAL   WORK   OF   A   BANK 

question  at  this  crisis  may  seem  small.  But  it  is  clear,  if  our 
analysis  of  the  existing  stage  of  development  of  business  cus- 
tom in  the  United  States  is  correct,  that  there  is  no  way  by 
which  inland  bills  of  exchange,  such  as  foreign  dealers  are 
accustomed  to,  can  be  created  through  purely  business  trans- 
actions, out  of  the  first-class  obligations  now  current  and 
likely  to  remain  current  in  this  country.  If  forced  by  law 
or  regulation,  fictitious  situations  can  doubtless  be  created, 
which  will  give  rise  to  specious  imitations  of  the  article  de- 
sired ;  but  with  such  transactions  the  more  honorable  part  of 
the  commercial  community  will  have  nothing  to  do.  The 
only  result  of  such  attempted  regulation  would  be  to  discour- 
age straight  dealing,  and  to  create  a  second-class  security  in 
place  of  a  prime  obligation  such  as  now  exists. 

Out  of  this  dilemma  there  are  two  avenues  of  escape. 
The  first  is  the  education  of  the  foreign  bill  broker  to  our 
credit  methods ;  the  second  is  the  open  acceptance  or  accom- 
modation endorsement  for  a  consideration  of  inland  trade 
drafts  by  banking  institutions,  such  as  has  already  been 
begun  by  several  of  our  leading  financial  institutions.  This 
practice  affords  the  guaranty  of  large  and  imposing  capital 
to  a  finance  bill  capable  of  currency  in  any  market  of  the 
world.  Of  course,  in  case  any  Reserve  Bank  should 
wish  to  use  the  international  market  it  could  make  bills  of 
the  very  highest  class  by  adding  its  endorsement  to  the  con- 
tents of  its  portfolio;  a  process  which  if  not  now  legalized 
might  easily  be  the  subject  of  legislation  in  the  future. 

It  is  plain  from  the  foregoing  analysis  and  description  of 
the  various  kinds  of  commercial  paper  currently  used  in 
transactions  described  as  admissible  under  the  act,  that  the 
final  criterion  of  any  given  piece  of  paper  is  the  credit  of  its 
maker;  that  credit  is  dependent  in  part  upon  the  character, 
in  part  upon  the  ability,  in  part  upon  the  capital  of  the  man 
or  men  who  accept  the  responsibility  for  it  by  their  signa- 
tures. As  to  whether  any  given  piece  of  paper  is  worthy  of 
discount  by  a  Federal  Reserve  Bank  is  a  question  which 
must  be  decided  by  the  officers  of  the  bank  itself.  They 
have  every  means  of  arriving  at  a  judgment  on  the  question 
involved.  They  are  usually  close  enough  to  the  transaction 
which  it  represents  to  warrant  a  valid  judgment. 

Considering  the  past  success  of  our  banking  system  in 
selecting  notes  of  the  best  class  for  their  portfolios  is  it  not 


ESSENTIALS    IN    GRANTING    CREDIT  477 

likely,  at  least  at  the  start,  that  if  unhampered  by  any  regu- 
lations, the  directors  of  the  Reserve  Banks  are  allowed  to 
discount  for  their  hanks  those  kinds  of  paper  with  which  as 
bank  officers  and  as  merchants  they  are  most  familiar,  the 
best  results  will  presently  be  attained?  In  case  of  any  ex- 
ception to  this  probability,  the  Reserve  Board  has  three 
representatives  on  the  directorate  of  every  Reserve  Bank  to 
warn  it  of  reckless  conduct  or  of  impending  trouble.  Trade 
customs  which  have  been  built  up  by  generations  of  wise  and 
successful  business  men  and  bankers,  in  the  slow  process  of 
adapting  their  methods  to  necessary  economies  in  distribu- 
tion, and  to  the  needs  of  the  seventeen  hundred  thousand 
firms,  individuals  and  corporations  actively  trading  in  this 
country,  cannot  wantonly  be  overturned  without  t>eril  both 
to  the  economic  and  moral  health  of  the  business  and  bank- 
ing structure.  And  for  these  reasons,  we  urge  that  in  exer- 
cising your  right  of  determination  and  definition,  or  with- 
holding from  the  present  exercise  of  that  right  as  you  deem 
most  proper,  you  will  agree  with  us  "that  commercial  paper 
in  the  present  form  and  use  be  accepted  by  the  Federal  Re- 
serve Board  from  member  banks  for  discount  and  currency 
issue  purposes." 

APPENDIX 

Computation  showing  result  in  terms  of  commercial 
paper  issues  and  of  office  detail,  of  changing  (a)  the  pres- 
ent short-time  system  of  settlement  in  sales  of  manufactured 
goods  to  (b)  that  of  settlement  by  four  months'  bills  of 
exchange. 

The  merchandise  is  supposed  to  be,  at  first  cost,  of  $12,- 
000  annual  value,  distributed  from  manufacturer  to  whole- 
saler at  the  rate  of  $1,000  per  month  in  two  equal  shipments 
of  $500  each;  and  from  wholesaler  to  retailers,  with  twenty 
per  cent,  gross  profit,  also  in  equal  monthly  installments  in 
forty  shipments  averaging  $30  each. 

Notes  Debt 

A.    On  present  terms  Created          Created 

Constant  debt  from  wholesaler  to  manufacturer,  open  acct. . .  $500 

Note  of  manufacturer  to  carry  this  debt  with  20  per  cent. 

margin    $400 

On   average   of  forty   days,  constant  debt   from  retailer  to 

wholesaler    1,600 

Note  of  wholesaler  to  carry  same  with  20  per  cent,  margin. .     1,300 

Constant  debt  created,  notes  and  open  accts $1,700  $3,100 

in  one  year,  total  of  six  months  paper,  pieces  created 4 


478  THE   PRACTICAL  WORK   OF   A   BANK 

B.     On  four  months  credit  settled  by  bill  of  exchange  or  note 

1  Transaction   between   manufacturer   and   wholesaler,   due 

continually  4x1000    

2  Transactions   between  wholesaler  and   retailers,  due  con- 

tinually  4x1200    

Constant  debt  created    $8,800 

Notes  needed  to  settle  debt  from  wholesaler  to  manufac- 
turer, 8,  of  $500  each  equals $4,000 

Notes  needed  to  settle  debts  from  retailers  to  wholesalers, 

160,  of  $30  each  equals 4,800 

Notes  constantly  in  circulation $8,800 

In  one  year,  total  number  of  pieces  created  of  four  months 

paper,  168x3  equals    50; 

Results  compared: 

Amount  Piec-t-- 

Note  settlement  basis — paper  outstanding $8,800 

(Notes   annually   required) 504 

Present  settlement  basis — paper  outstanding 1,700 

(Notes  annually  required) 4 

Increase    $7,100  500 

Increase  in  amount  of  outstanding  paper 417% 

Increase  in  annual  office  operations 12500  per  cent. 

It  will  be  observed  that  under  present  terms  the  amount  of  paper  created  to 
carry  the  entire  series  of  transactions  is  less  than  the  total  amount  of  debt 
created  by  such  transactions,  while  under  the  bill  of  exchange  plan  the  notes 
are  equal  to  the  debt  created.  This  means  a  lowering  of  the  self-liquidating 
quality  of  the  bill  of  exchange,  as  compared  to  the  promissory  note,  with  margin, 
based  on  book  accounts  receivable. 

THE  COMMERCIAL  PAPER  BROKER 

The  commercial  paper  broker  is  a  development  of  the 
last  fifteen  or  twenty  years.  His  business  is  now  enormous, 
covering  the  whole  country,  both  in  buying  and  selling 
paper.  He  has  a  finely  organized  credit  department,  and  a 
body  of  trained  salesmen.  He  is  the  go-between  for  the  bor- 
rower desiring  accommodation  and  the  banker  desiring  in- 
vestment. He  fulfills  a  very  important  and  useful  service  in 
the  economic  scheme.  He  knows  where  paper  can  be  sold. 
He  knows  where  paper  can  be  bought.  He  "makes"  the 
money  market,  or  at  least  knows  where  it  is. 

At  first  he  was  strictly  a  broker.  He  got  his  commission 
for  selling,  and  paid  for  the  paper  only  when  sold.  But  he 
has  grown  to  such  proportions  and  is  of  such  wealth  and 
with  such  good  banking  accommodations  that  he  can  now 
send  his  check  upon  receipt  of  the  paper,  less  his  commission, 
usually  one-quarter  of  one  per  cent,  for  three  months'  paper. 
In  many  cases  he  now  buys  the  paper  outright,  pledging  it 
as  security  with  his  bank,  if  need  be,  or,  as  is  the  case  in  a 


ESSENTIALS    IN    GRANTING    CREDIT  479 

few  instances,  is  strong  enough  in  his  own  capital  to  pay 
outright  for  it.  If  he  has  no  market  he  may  advance  on  the 
paper;  or  if  the  market  is  too  high,  he  may  do  likewise,  and 
sell  when  conditions  are  better. 

The  broker  sells  for  cash,  but  often  under  a  week  or  ten 
days'  option.  He  does  not  indorse  the  paper,  nor  guarantee 
its  payment ;  but  he  does  morally  and  legally  guarantee  that 
it  is  regular.  He  has  the  facilities  to  determine  this.  His 
credit  department  has  records  of  every  borrower,  who  should 
sign,  and  under  what  conditions,  and  the  fact  that  he  offers 
it  is  guarantee  of  its  genuine  character  and  of  his  opinion  as 
to  its  worth. 

It  has  been  discovered  that  firms  which  could  not  sell 
their  single-name  paper,  have,  at  the  instigation  of  unscrup- 
ulous brokers,  drawn  notes  in  odd  amounts,  and  exchanged 
them,  each  indorsing  for  the  other,  and  when  offered  on  the 
market  as  receivables,  they  have  all  the  earmarks  of  legiti- 
macy, but  are  accommodation  paper,  pure  and  simple.  Of 
course  such  a  firm  should  be  eliminated  from  the  loaning  list 
as  soon  as  this  is  discovered,  and  no  reputable  broker  will 
handle  their  paper. 

Competition  has,  of  course,  brought  some  undesirable 
elements  into  the  field,  but  as  a  whole  commercial  paper 
brokers  are  of  high  character. 

BUYING  PAPER  ON  OPTION 

Many  banks  buy  on  option  running  from  a  week  to  the 
date  of  the  next  board  meeting.  Paper  so  bought  is  put 
under  examination  and  if  it  does  not  meet  full  approval  is 
returned.  When  returned  the  interest  earned  during  the 
time  the  bank  had  the  paper  is,  of  course,  paid.  Banks 
dealing  with  one  or  two  houses  will,  in  the  course  of  time, 
establish  favorable  relations  and  deal  in  all  fairness  one  with 
the  other. 

The  average  banker  is  not  in  a  position  to  judge  a  risk 
a  thousand  miles  away.  He  cannot  analyze  a  statement;  he 
depends  upon  his  city  correspondent  to  select  his  paper  and 
buys  on  the  latter's  recommendation.  But  it  requires  no 
more  ability  to  judge  foreign  paper,  than  it  does  to  judge  a 
loan  at  home,  provided  the  two  are  analyzed  from  the  same 
data.  The  concerns  may  be  larger  and,  therefore,  a  little 


480  THE    PRACTICAL   WORK   OF   A   BANK 

more  difficult  to  pass  judgment  upon,  but  the  principles  are 
the  same.  A  bank  may  select  a  few  well-known  names  and, 
becoming  familiar  with  these,  make  its  purchases  accord- 
ingly. 

Whether  a  bank  buys  on  its  own  investigation  or  on 
the  advice  of  its  correspondent,  it  should  make  the  research 
as  a  matter  of  knowledge,  and  cover  practically  the  same 
ground  as  its  correspondent  has  covered  in  order  to  recom- 
mend the  paper.  Paper  offered  by  the  broker  is  accom- 
panied by  a  statement  of  condition,  with  names  of  banks 
that  have  bought  the  paper,  and  trade  references.  The  bank- 
er should  analyze  the  statement,  communicate  with  the  ref- 
erences, and,  in  addition  to  suggestions  already  made,  ob- 
serve the  following : 

The  broker — Is  he  well  known,  well  established,  conser- 
vative, and  offering  the  best  names  on  the  market?  Is  he 
morally  and  financially  responsible?  Is  he  merely  a  broker 
— an  offerer — or  does  he  buy  and  sell  outright?  Is  he  a 
strong  man?  The  city  correspondents  will  advise  on  this 
point. 

Is  the  business  of  the  borrower  a  substantial  one?  How 
old?  Is  it  a  staple  line?  Is  it  a  different  line  than  you  loan 
to  locally?  Has  the  borrower  ample  capital?  What  is  the 
purpose  of  the  paper  offered?  Is  the  management  honest, 
capable  and  energetic?  You  must  know  that  the  business  is 
administered  by  brains,  or  it  is  not  a  safe  risk.  No  plungers, 
or  get-rich-quick  propositions,  and  the  men  must  know  econ- 
omy and  practice  it.  Does  the  statement  analyze  well?  Does 
the  trade  think  well  of  the  concern?  What  do  the  local 
banks  say?  What  do  his  competitors  say? 

Buy  of  large  concerns,  those  having  total  assets  of,  say, 
half  a  million  or  more.  Scatter  the  risks.  Check  carefully 
through  banks  having  held  the  paper.  Check  through  the 
trades.  Buy  only  where  the  margin  of  safety — assets  to 
liabilities — is  at  least  two  to  one,  except  it  may  be  in  such 
lines  as  meats,  etc.,  where  a  less  margin  is  permissible.  Buy 
paper  of  firms  which  have  been  recently  audited  by  certified 
public  accountants.  Buy  of  established  firms  dealing  in 
staple  products  and  not  those  arising  from  fashions  and 
luxuries.  Eliminate  the  fixed  assets  entirely  from  the  credit 
statement  and  regard  them  only  as  backbone  to  strengthen 
the  credit  structure. 


481 

It  is  well  to  classify  paper  by  States  or  districts,  and  for 
this  a  loose-leaf  ledger  is  used.  The  name  of  the  city,  town 
or  State  is  placed  opposite  the  months  of  the  year  running 
across  the  page.  Each  State  may  be  given  a  section  in  the 
book  and  the  various  places  separate  leaves,  so  that  the  exact 
amount  of  paper  in  each  large  city  will  be  known. 

Paper  held  may  also  be  classified  by  industries,  so  that 
the  risk  in  each  line  may  be  known ;  for  what  will  affect  one 
line  will  not  affect  another.  A  good  season  in  one  industry 
may  be  a  poor  one  in  another,  and  it  is  well  to  have  the  lines 
scattered  as  to  industries  as  well  as  to  sections. 

The  location  is  important.  The  retailer  should  be  in  a 
good  shopping  district,  the  manufacturer  near  good  ship- 
ping facilities.  The  latter 's  transportation  costs  are  a  main 
factor,  both  as  a  saving  in  freight  and  also  in  cheapness  of 
raw  material.  Labor  supply  and  living  conditions  affect 
manufacturing,  while  the  appearance  of  the  store,  the  stock, 
and  the  general  aspect  of  the  place  are  important  in  selling 
goods,  and  have  their  bearing  on  the  credit  risk. 

As  a  rule,  not  more  than  from  one-fourth  to  one-third 
the  excess  of  quick  assets  over  quick  liabilities  is  considered 
the  limit  of  borrowing,  where  the  ratio  of  quick  assets  to 
liabilities  is  two  to  one.  The  credit  is  rapidly  restricted 
where  the  ratio  is  less.  Where  the  assets  are  practically  cash, 
as  in  cotton  or  grain,  the  ratio  may  be  larger  with  safety. 

It  is  the  policy  of  some  firms  to  clean  up  and  go  out  of 
debt  at  various  times,  and  while  such  concerns  as  meats  and 
groceries  will  have  a  steady  output  of  paper,  because  of  the 
steady  trade,  such  a  line  as  millinery,  which  is  seasonal, 
should  clean  up  when  the  selling  season  is  over  and  the 
stocks  have  been  turned  into  money.  Likewise  wool.  It  is 
all  bought  in  a  few  months,  but  sold  throughout  the  year, 
and  so  wool  debts  should  grow  less  and  less  as  the  season 
wanes. 

It  is  important  to  know  the  borrower's  annual  sales  in 
order  to  know  how  often  he  turns  his  capital  over.  If  the 
capital  is  turned  but  twice  a  year  it  indicates  slow  sales ;  but 
if  turned  six  times  it  means  that  one  dollar  does  the  work 
of  six,  and  costs  the  price  of  one.  The  business  is  liquid 
only  as  it  turns  the  stock,  bringing  in  a  constant  stream  of 
new  goods  and  money,  and  getting  rid  of  the  old. 

It  is  told  of  the  late  Benjamin  Altman  that  he  had  as 

82 


482  THE   PRACTICAL   WORK  OF   A   BANK 

a  settled  policy  the  quick  moving  of  goods.  An  article  was 
placed  on  sale  at  its  regular  selling  price.  If  it  did  not  move 
quickly  at  that  price,  it  was  reduced.  If  then  it  did  not 
move,  it  was  marked  down  every  Friday  until  it  sold;  and 
such  a  policy  resulted  in  quick  sales,  and  no  dead  stock. 

The  loan  to  a  manufacturer  is  for  the  purpose  of  bridg- 
ing the  time  between  raw  material  and  finished  product,  and 
should  liquidate  itself  when  the  material  is  turned  into  fin- 
ished form.  Loans  to  farmers  are  for  the  purpose  of  plant- 
ing, fertilizing  and  harvesting  and  should  liquidate  them- 
selves when  the  harvest  is  gathered. 

A  wholesaler  who  turns  his  stock  six  times  a  year  should 
not  borrow  over  one-sixth  of  his  sales,  and  his  terms  of  credit 
should  not  be  longer  than  his  terms  of  sale.  Loans  to  a 
retailing  merchant  are  to  enable  him  to  carry  his  stock  until 
sold,  and  if  the  stock  is  liquid  and  his  sales  quick,  and  his 
management  active  and  aggressive,  he  should  promptly 
liquidate  his  debt;  but  if  he  buys  unseasonable  stock,  unsal- 
able stock,  and  has  poor  selling  methods,  he  cannot  pay,  for 
goods  on  the  shelf  never  pay  bills. 

ANSWERING  CREDIT  INQUIRIES26 

Much  of  the  credit  information  is  obtained  by  corre- 
spondence. In  writing  the  answer  to  a  credit  inquiry,  you 
are  generally  justified  in  assuming  that  your  correspondent, 
unless  he  has  indicated  special  information  desired,  wants  to 
know  about  the  same  things  you  would  under  similar  cir- 
cumstances. A  well  balanced  letter  gives  first,  a  brief  his- 
tory of  the  business,  its  form,  whether  firm  or  corporation; 
if  the  first,  the  members;  if  incorporated,  the  date,  State 
laws,  authorized  and  paid-in  capital,  and  essential  facts  re- 
garding important  changes,  special  processes  owned  or  con- 
ditions which  give  the  concern  an  advantage  or  operate 
against  it. 

The  next  paragraph  may  be  devoted  to  the  consideration 
of  the  financial  standing.  If  you  have  figures  which  can  be 
used  without  breach  of  confidence  and  the  nature  of  the  in- 
quiry indicates  that  your  correspondent  does  not  have  them, 
it  is  well  to  briefly  summarize  the  statement.  If  the  subject 

2«F.  B.  Snyder  ante. 


ESSENTIALS    IN    GRANTING    CREDIT  483 

of  your  letter  sells  paper  in  the  street  and  the  inquirer 
would  ordinarily  have  a  statement  furnished  by  the  broker, 
it  is  well  to  make  such  comment  on  the  various  items  as  your 
investigations  justify. 

In  writing  regarding  one  of  your  own  customers,  a  brief 
explanation  of  some  unusual  feature  in  his  statement  will 
often  clear  up  a  vexing  point  and  make  a  sale  of  his  paper. 

The  third  paragraph  is  devoted  to  a  summary  of  the  re- 
sults of  such  bank  and  trade  investigation  as  you  have  made 
and  is  complete  opinion  of  other  people  regarding  the  name. 
The  letter  may  well  be  concluded  with  a  short  explanation 
of  your  own  opinion  and  your  attitude  toward  the  risk. 


REDISCOUNT  OF  PAPER  IN  FEDERAL  RESERVE  BANKS 

Commercial  paper  will,  under  the  Federal  Reserve  Sys- 
tem, have  added  usefulness  and  dignity,  in  that  it  will  be 
readily  discounted  by  the  Federal  Reserve  Banks  and  will 
form  the  basis  of  the  Federal  Reserve  notes. 

In  defining  commercial  paper  the  Federal  Reserve  Board 
announced  certain  fundamental  principles.  In  brief  they  are : 

That  no  bill  shall  be  admitted  to  rediscount  by  a  Reserve 
Bank  the  proceeds  of  which  have  been  or  are  to  be  applied 
to  a  permanent  investment.  Maturities  of  discounted  bills 
should  be  well  distributed,  so  that  a  Reserve  Bank  should  be 
in  a  position  to  liquidate  one-third  of  all  its  investments 
within  thirty  days.  Bills  presented  for  rediscount  should  be 
"essentially  self-liquidating,"  which  as  the  board  explained 
means  that  they  should  represent  some  distinct  step  in  the 
productive  or  olistributive  process  and  be  of  such  character 
that  it  is  reasonably  sure  that  they  can  be  collected  at  matu- 
rity. 

In  addition  to  these  principles  the  board  requires  that 
such  paper  be  indorsed  by  the  member  bank  offering  it  for 
rediscount ;  that  the  indorser  bank  waive  demand  notice  and 
protest ;  that  such  paper  be  issued  or  drawn  for  agricultural, 
industrial  or  commercial  purposes  or  the  proceeds  of  which 
have  been  so  used;  that  if  in  the  form  of  acceptances  they 
must  be  based  on  transactions  involving  the  importation  or 


484  THE    PRACTICAL   WORK  OF   A  BANK 

exportation  of  goods  and  have  a  maturity  of  not  longer  than 
three  months.  Acceptances  must  be  indorsed  by  a  member 
bank,  and  the  total  amount  made  by  any  member  bank  shall 
not  exceed  one-half  its  paid-up  capital  and  surplus." 

The  board  also  announced  that  for  the  present  it  has 
fixed  the  limit  which  a  Reserve  Bank  may  rediscount  paper 
"for  agricultural  purposes  or  based  on  live  stock"  having 
not  more  than  six  months  maturity  at  twenty-five  per  cent, 
of  the  capital  of  the  bank.  This  limit  may  be  increased  in 
agricultural  districts  in  time  of  need. 

Temporarily  certified  public  accountant's  statements  will 
not  be  required,  but  it  will  eventually  lead  to  this.  The 
statement  must  be  under  oath.  It  should  describe  the  busi- 
ness. It  should  contain  the  balance  sheet  and  profit  and 
loss  account.  Assets  should  be  divided  into  quick  and  liquid 
assets,  and  liabilities  likewise.  Short-term  paper  should  not 
be  sold  against  permanent  improvements.  The  statement 
must  show  the  maximum  amount  the  firm  expects  to  borrow 
in  the  market.  Consent  of  the  member  bank  must  be  ob- 
tained if  this  limit  is  exceeded.  The  affixing  of  the  stamp 
is  equivalent  to  a  declaration  that  the  statement  has  been 
analyzed.  Notes,  drafts  and  bills  of  exchange  which  are 
issued  or  drawn  for  the  purpose  of  carrying  or  trading  in 
stocks,  bonds  or  other  investment  securities  (except  bonds 
and  notes  of  the  United  States)  are  clearly  excluded.  The 
act  further  excludes  notes,  drafts  and  bills  of  exchange  cov- 
ering "merely  investments,"  and  from  this  point  of  view 
are  to  be  excluded  all  bills  whose  proceeds  have  been  or  are 
to  be  used  in  permanent  or  fixed  investments  of  any  kind. 
Agricultural,  industrial  and  commercial  purposes  cannot  be 
held  to  include  investments  in  land,  plant,  machinery,  per- 
manent improvements  or  transactions  of  a  similar  nature. 
Bills  must  arise  out  of  actual  commercial  transactions,  and 
the  proceeds  must  have  been  used  or  are  to  be  used  for  agri- 
cultural, industrial  or  commercial  purposes.  They  are  not 
eligible  when  drawn  to  cover  merely  speculative  investments. 

Briefly  stated  the  present  (July,  1917)  rules  for  the  dis- 
count of  acceptances  in  the  Federal  Reserve  Banks  are  as 
follows : 

2?By  the  amendment  of  June  21,  1917,  the  Federal  Reserve  Board  may  allow 
banks  to  accept  up  to  the  amount  of  their  capital  and  surplus.  Domestic  ac- 
ceptances are  now  permitted.  (July,  1917.) 


ESSENTIALS    IN    GRANTING    CREDIT  486 

An  acceptance  is  eligible  for  rediscount  at  the  Federal  Re- 
serve Banks,  provided  it  has  arisen  out  of  an  actual  com- 
mercial transaction,  domestic  or  foreign.  That  is,  it  must  be 
a  bill  which  has  been  drawn  for  agricultural,  industrial  or 
commercial  purposes,  or  the  proceeds  of  which  have  been  used 
or  are  to  be  used  for  the  purpose  of  producing,  carrying,  or 
marketing  goods  in  one  or  more  of  the  steps  of  production, 
manufacture  or  distribution.  It  must  have  a  maturity  of 
not  more  than  three  months,  exclusive  of  days  of  grace,  and 
must  have  been  drawn  under  a  credit  opened  for  the  purpose 
of  conducting  or  settling  accounts  resulting  from  a  transac- 
tion involving:  (a)  Shipment  of  goods  between  the  United 
States  or  any  foreign  country,  or  between  the  United 
States  and  any  of  its  dependencies  or  insular  possessions,  or 
between  foreign  countries,  (b)  The  shipment  of  goods 
within  the  United  States,  provided  the  bill  is  accompanied  at 
the  time  of  its  acceptance  by  shipping  documents,  (c)  The 
storage  within  the  United  States  of  readily  marketable  goods, 
provided  the  acceptor  of  the  bill  is  secured  by  a  warehouse 
terminal  or  similar  receipt,  (d)  The  storage  within  the 
United  States  of  goods  which  have  been  actually  sold,  pro- 
vided the  acceptor  of  the  bill  is  secured  by  the  pledge  of  such 
goods. 

DEDUCTIONS  OF  A  CREDIT  MAN  IN  ANALYZING  BUSINESS 

STATEMENTS28 

No  department  of  businsess  administration  offers  a 
broader  or  more  inviting  field  than  the  credits ;  for  in  the  ad- 
ministration of  a  credit  department,  all  that  a  man  may 
know  of  men,  business  and  business  methods  can  be  applied 
in  full  measure.  The  credit  department  is  a  department  of 
opportunity  and  applied  knowledge.  The  credit  man  meets 
the  executives  and  his  work  is  executory.  Whatever  he  ac- 
complishes is  quickly  noticeable  and  his  work  gains  immedi- 
ate recognition.  It,  therefore,  is  attractive  from  the  stand- 
point of  its  possibilities.  Inasmuch  as  one  of  the  fundamen- 
tal functions  of  the  bank  is  to  loan  money,  and  its  profits 

28Address  by  the  author  before  Baltimore  Chapter,  American  Institute  of 
Banking,  January  7,  1915,  which  summarizes  and  applies  the  foregoing  principles 
in  the  analysis  of  credit  statements. 


486 


THE   PRACTICAL  WORK   OF   A   BANK 


Borrower 


Business 


Address 


Security  held 


Line  of  Credit,  $ 


AS    MAKER 

AS   ENDORSER 

.  



AVERAGE    BALANCES 

DIGEST  OF  STATEMENT 

MWrth 

Av.  Balance 

Month 

AT.  Balance 

Assets 
Cash.  
Aec'U  Receivable.  
Bills  Receivable.  
Merchandise  
Total          . 

X 

Realty  Equities.  
Other        »      _ 
Liabilities 
Acc'ts  Payable.  
Bills       " 

Total— 

1 

.Net  Worth.  .--,-,- 
Ratio.  i_ 
Sate.  ..i...-..,-. 

LIA1JILITY  UECOKI)  WITH   DIGEST  OK  STATEMENT 


ESSENTIALS    IN    GRANTING    CREDIT  187 

come  from  loaning  money  safely,  the  credit  department  be- 
comes largely  responsible  for  the  success  of  the  institution. 


QUALITIES  OF  A  CREDIT  MAN 

The  individual  who  presides  over  this  department  must 
have  certain  qualities  that  are  essential.  First,  he  must  have 
due  regard  for  system,  for  the  information  must  be  so  ar- 
ranged as  to  be  quickly  obtainable  and  complete  when  it  is 
wanted.  He  must  have  a  broad  knowledge  of  business 
methods  and  practices.  He  must  know  the  terms  of  business 
and  the  state  of  business.  He  must  know  trade  secrets — 
not  to  give  them  away,  but  to  use.  He  must  be  somewhat  of 
an  accountant,  for  unless  he  has  the  analytic  mind  that  ac- 
countancy develops,  he  cannot  make  proper  deductions.  He 
must  know  how  books  are  kept  and  how  to  keep  books.  He 
must  be  a  surgeon — able  to  dissect,  and  a  physician — able  to 
prescribe. 

He  must  have  the  'Credit  sense" — the  detective's  instinct, 
to  quickly  perceive  a  clue  that  may  begin  with  a  button  and 
end  in  a  conviction.  He  must»know  something  of  law — the 
law  of  collections,  of  negotiable  instruments,  of  bankruptcy. 
Like  a  good  trial  attorney,  all  that  he  may  know  will  come 
into  play  sometime  and  somewhere.  His  work  is  not  like 
much  of  the  work  in  a  bank,  a  daily  grind;  for  while  each 
day  has  its  duties,  and  each  day  its  problems,  to-day  will 
not  be  a  yesterday,  nor  will  to-morrow  be  another  to-day. 


THE  CREDIT  MAN'S  TOOLS 

The  tools  with  which  a  credit  man  works  have  become 
quite  as  much  standardized  as  the  carpenter's  saw  and  ham- 
mer. First,  of  course,  his  brains.  While  every  workman 
needs  a  proper  proportion  of  gray  matter,  the  credit  man 
needs  a  generous  supply,  for  in  many  instances  he  will  have 
no  one  to  tell  him  what  to  do.  And  the  gray  matter  should 
be  well  polished  by  study  and  well  nourished  by  exercise. 
He  can  acquire  much  of  the  needful  in  his  calling  by  tutor- 


488  THE    PRACTICAL  WORK  OF   A   BANK 

ing  under  the  slow  but  thorough  schoolmaster,  experience. 

The  deductive  ability  of  the  credit  man  will  be  used  in 
various  ways,  but  principally  in  analyzing  men  and  figures. 
Here  he  can  "use  his  head"  to  advantage.  He  must  know 
men.  He  must  know  human  nature.  He  must  know  that 
certain  classes  of  men  are  good  or  poor  risks,  and  why.  He 
must  know  what  men,  as  a  class,  do  under  certain  conditions. 
He  must  be  a  good  mixer  and  a  good  artist  at  painting 
mental  pictures.  He  must  be  a  good  tailor  and  able  to  take 
correct  measures.  It  would  seem  that  the  collar  and  the  tie, 
the  jewelry  and  the  clothes,  have  nothing  to  do  with  credit; 
yet  the  credit  man  will  tell  you  it  does.  The  man  careful 
and  tasty  about  his  dress  will  be  likely  to  be  careful  about 
other  things.  He  wh'o  is  reckless  in  spending  money  for 
pleasure  may  be  reckless  in  spending  money  in  business.  Big 
traits  manifest  themselves  in  little  things. 

The  next  in  the  list  of  tools  are  the  recognized  agency  re- 
ports. Not  that  they  are  more  important  than  other  tools, 
but  they  are  the  foundation  for  much  of  the  credit  work. 
These  agencies  are  so  well  established  and  cover  the  field  so 
thoroughly,  that  they  are  used  everywhere  by  banks  and 
business  houses  as  commonly  as  the  fountain  pen.  The  two 
"eading  agencies  classify  and  rate  practically  every  business 
house  in  the  country,  and,  supplemented  by  the  agencies  that 
report  on  the  more  personal  side  of  individuals,  they  afford 
the  beginning  of  every  credit  investigation.  To  the  pub- 
lished ratings  are  added  special  reports,  that  go  into  minute 
details  regarding  the  person,  his  habits,  his  record,  and  other 
information  concerning  the  moral  and  financial  standing  of 
the  applicant. 

Supplementing  this  still  further  are  the  reports  of  banks, 
and  firms  in  the  trade,  which  have  intimate  knowledge  of  the 
party,  experiences  in  lending  money  and  dealing  in  general 
with  him,  and  can  state  with  authority  the  habits  of  pay. 

Next  come  the  published  reports  of  mortgages,  judg- 
ments, bankruptcies  and  failures,  assignments,  etc.,  which 
are  all  important  as  danger  signals. 

Then  there  are  those  underground  channels  of  informa- 
tion, gossip,  bits  of  information  gathered  from  various 
sources,  all  bearing  upon  the  credit  risk. 


ESSENTIALS    IN    GRANTING    CREDIT 


489 


Lastly  and  by  no  means  the  least  important,  is  the  state- 
ment of  condition,  which,  unless  made  by  an  independent 
audit,  has  well  been  termed  "the  borrower's  estimate  of  him- 
self." This  may  be  the  beginning  from  which  all  other 
sources  of  information  radiate,  or  the  focal  point  to  which 


FOUB-DRAWEH    STEEL    CREDIT   FIUE 


they  all  gather.  But  whether  the  beginning  or  the  end  of 
the  inquiry,  the  statement  is  the  one  factor  that  is  coming  to 
be  given  its  proper  place  in  the  credit  scheme.  All  the  above 
finds  lodgment  in  the  credit  department  files  as  tools  for  the 
credit  man's  work. 


490  THE   PRACTICAL  WORK  OF   A   BANK 

Whether  the  credit  department  is  a  finely  organized  part 
of  the  bank,  with  its  chief,  its  clerks  and  its  files,  or  one  of 
the  many  nooks  in  the  brain  of  a  busy  bank  official,  the  pur- 
pose of  the  credit  department  is  twofold;  (a)  to  assemble  in- 
formation, and  (b)  to  use  it. 


The  first  deduction  which  the  credit  man  will  insist  upon 
being  satisfactorily  established  is  that  the  applicant  is  honest. 
This  may  seem  a  trifle  threadbare;  but  it  is  a  truth  that  is 
admitted  by  all  who  understand  credit  science,  and  is  recog- 
nized as  an  essential,  if  not  the  essential  element.  This  hon- 
esty does  not  necessarily  mean  that  the  applicant  shall  have 
all  the  Puritanistic  virtues  of  the  ethical  code  of  long  ago,  go 
to  church  and  say  long  prayers — for  some  credit  men  prefer 
that  he  should  have  his  religion  on  the  inside  and  not  as  an 
adornment.  But  he  must  be  a  man  of  strict  integrity,  as 
integrity  goes  in  business,  deal  fairly,  and,  to  quote  the  great 
commentator  Blackstone,  "live  honestly,  harm  nobody  and 
render  every  man  his  due."  He  must  give  full  measure,  do 
no  tricky  thing,  fail  only  because  there  is  no  other  way,  and 
have  that  reputation  as  a  business  man  which  stamps  him 
worthy  of  his  citizenship. 

In  the  second  place  he  must  be  able  as  well  as  honorable ; 
he  must  be  a  man  who  can.  Thirty  per  cent,  of  business  fail- 
ures are  due  to  lack  of  ability.  The  art  of  management  is  a 
fine  one  and  all  cannot  acquire  it.  Business  cannot  run  it- 
self; there  must  be  the  ''know  how"  behind  it;  and  this  know 
how  cannot  be  learned  at  the  bank's  expense.  It  must 
preferably  be  learned  in  the  school  of  experience  as  an  un- 
derling, else  as  a  superior  he  may  lose  his  own  capital  and 
that  of  others  while  acquiring  the  ability  to  administer. 

Thirdly,  there  must  be  the  assurance  of  adequate  capital, 
for  thirty  per  cent,  of  the  business  failures  are  due  to  lack 
of  capital,  this  cause  contributing  as  many  failures  as  lack  of 
ability.  How  much  that  capital  should  be  is  a  credit  deduc- 
tion to  be  determined  from  the  facts.  It  must  be  enough. 
Business  can  run  on  credit  for  a  time,  and  in  a  limited  way, 
but  there  must  be  the  backbone  of  invested  capital  to  sup- 
port the  credit  structure,  or  it  will  collapse  under  strain. 
Capital  is  like  the  underpinning  of  a  building — it  gives 
support  to  the  structure  while  the  work  is  being  carried  on. 


ESSENTIALS    IN    GRANTING    CREDIT  191 

Credit  makes  a  beautiful  structure ;  but  it  needs  the  stability 
of  capital  to  insure  lasting  qualities.  And  every  business 
must  of  necessity  have  its  adequate  capital  investment  or  it 
fails. 

"THE  THREE  C's  OF  CREDIT" 

For  the  present  purposes  we  will  assume  that  the 
three  C's  of  credit — Character,  Capacity  and  Capital — are 
in  evidence  in  each  of  the  problems  under  review.  In 
just  what  proportion  is  not  essential  for  the  time  being,  it 
being  enough  that  they  exist  in  a  measure  sufficient  to  pass 
the  test. 

How  this  is  ascertained  depends  upon  the  loan,  whether 
local  or  foreign.  If  the  applicant  is  a  depositor,  we  will 
have  his  average  card  to  judge  the  quality  of  his  bank  ac- 
count ;  he  may  be  known  personally ;  we  may  get  a  report  on 
him;  we  may  inquire  among  the  business  houses  where  he 
trades.  If  the  borrower  is  not  known,  as  most  of  the  bor- 
rowers in  the  open  market  are  riot,  we  ascertain  the  moral 
standing  by  communicating  with  the  banks  and  trade  con- 
nections given  as  references.  But  being  satisfied  on  the  es- 
sential points  suggested  above,  the  proposition  gets  down  to 
an  analysis  of  the  statement,  in  order  to  ascertain  the  prob- 
ability of  the  loan  being  paid  from  the  property  worth,  ir- 
respective of  its  moral  setting;  for  ultimately  the  loan  must 
be  paid  from  the  earnings  and  assets  of  the  business.  If  there 
be  honesty  and  ability  but  no  resources,  the  former  qualities, 
however  much  in  evidence,  will  make  a  poor  paymaster. 
From  the  business  as  a  business,  buying  and  selling,  trading 
and  taking  trading  profits,  the  loan  must  be  paid,  and  it  is 
now  to  inquire  if,  in  the  probabilities  of  business,  the  appli- 
cant will,  in  the  course  of  time,  be  able  to  make  good  on  his 
promise.  This  is  the  purpose  of  the  statement. 

We  shall,  therefore,  take  four  representative  statements 
— actual  statements,  in  different  lines  of  business:  (a) 
Meats,  because  of  the  liquidity  of  the  assets  and  their  quick 
convertibility;  (b)  groceries,  because  of  their  wide  demand, 
and  likewise  quick  convertibility;  (c)  millinery,  because  of 
its  seasonable  character  and  risky  qualities;  (d)  a  manufac- 
turer of  brass  beds,  to  illustrate  points  found  only  in  manu- 
facturing statements.  By  dissecting  these  statements  we 
shall  unconsciously  apply  many  credit  principles,  and  not 


492  THE   PRACTICAL   WORK   OF   A   BANK 

only  endeavor  to  arrive  at  proper  conclusions,  but  under- 
stand the  logic  by  which  they  are  obtained.  For  every  de- 
duction there  is  a  reason,  the  reason  being  better  understood 
by  applying  a  principle  than  merely  talking  about  it. 

ESSENTIALS  IN  A  CREDIT  STATEMENT 

Forming  as  it  does  the  foundation  of  the  credit  man's 
deductions,  two  things  are  essential  in  a  statement:  (a)  That 
the  statement  be  an  authentic  summary  of  the  borrower's 
financial  condition.  It  should  be  accompanied  by  a  profit 
and  loss  statement  to  show  the  progress  of  the  business  as 
the  statement  shows  its  position.  This  statement  should 
preferably  be  made  by  an  independent  auditor  whose  sole 
purpose  is  reliability  and  conservatism ;  for  if  made  by  the 
borrower  or  under  his  direction  it  is  not  only  apt  to  be  biased 
in  his  favor,  but  overstate  the  assets  and  understate  the 
liabilities,  human  nature  being  prone  to  make  allowances  for 
itself.  If  it  is  certified  by  a  recognized  firm  of  public  ac- 
countants, so  much  the  better;  if  not,  all  that  the  credit  man 
may  know  concerning  the  integrity  of  the  would-be  borrower 
will  be  opportune. 

It  has  been  well  said  that  it  is  not  the  crooked  borrower 
who  is  most  to  be  feared  but  the  deceived  borrower — the  one 
who  is  himself  misinformed  as  to  his  condition,  and  who 
passes  the  deception  on  to  his  bank.  A  crooked  borrower 
may  be  a  good  window  dresser,  but  a  deceived  borrower  is  a 
false  window  dresser.  He  mistakes  wax  figures  for  human 
beings,  and  papier  mache  for  oak.  He  does  not  know  the 
real  from  the  false,  (b)  The  statement  must  be  of  recent 
date — six  months  should  be  the  limit,  for  much  can  happen 
in  a  few  months,  and  semi-yearly  statements  are  none  too 
frequent.  In  the  analysis  of  a  credit  statement  the  first 
things  to  be  noticed  are: 

(1)  The  line — whether  staple  or  seasonal;  a  novelty  or 
a  necessity.  Obviously  the  broader  the  market,  the  more 
steady  the  demand;  and  the  nearer  it  approaches  the  abso- 
lute necessities  of  life  the  better.  We  can  get  along  with 
last  year's  bonnet,  but  we  cannot  live  on  last  year's  bread. 

If  the  application  is  from  an  out-of-town  borrower — 
commercial  paper,  it  should  not  be  in  the  same  line  as  the 
loans  that  predominate  in  the  home  trade.  Thus,  a  bank 
loaning  largely  on  lumber  should  not  buy  lumber  paper; 


ESSENTIALS    IN    GRANTING    CREDIT  498 

and  the  one  that  loans  on  cotton  should  not  buy  cotton 
paper.  Scatter  the  eggs  rather  than  scramble  them.  A 
bank  like  an  individual  thrives  best  under  a  varied  diet. 

(2)  The  ratio  of  quick  assets  to  quick  liabilities.  It  is 
apparent  that  maturing  debts  can  be  met  only  by  maturing 
credits.  The  assets  must  turn  into  money  to  meet  the  ma- 
turing obligations,  and  unless  there  is  a  sufficiency  of  assets, 
they  may  shrink  before  realization  to  the  danger  point. 
Book  accounts  are  never  worth  their  face.  The  shrinkage 
depends  upon  the  character  of  the  business,  the  care  used  in 
the  credit  department,  the  efficiency  of  the  collecting  system 
and  the  state  of  trade;  but  there  must  be  a  margin  for 
safety. 

Credit  men  differ  as  to  the  proper  proportion  of  quick 
assets  to  quick  liabilities,  but  the  ratio  should  run  from  one 
and  one-half  to  three  to  one,  depending  upon  the  nature  of 
the  business.  A  quick  asset  like  meat  will  require  less  mar- 
gin than  a  slow  asset  like  a  stock  of  rare  drugs.  This  ratio 
is  quickly  determined,  the  standard  statement  giving  the 
quick  assets  and  quick  liabilities  segregated,  so  that  com- 
parison is  quickly  made.  This  being  satisfactory,  we  are 
prepared  to  make  other  deductions  looking  to  the  desirabil- 
ity or  undesirability  of  the  extension  of  credit.  We  will 
take,  first,  the  statement  of  a  wholesale  meat  concern. 

STATEMENT  No.  1. 

The  Packing  Company. 
November  1,  1914. 

ASSETS. 

i 

Cash    $164,000 

Accounts  receivable   242,000 

Merchandise    423,000 

$829,000 
Plant    373,000 


$1,202,000 
LIABILITIES. 

Bills  payable   $391,000 

Accounts  payable   41,000  432,000 


Net    worth    $770,000 

Capital   $5,000,000 

Surplus    271,000 

Sales    7,500,000 

Ratio  of  quick  assets  to  quick  liabilities:  about  2  to  1. 


494  THE   PRACTICAL  WORK  OF   A   BANK 

COMMENT  ON  STATEMENT  No.  1 

First,  we  note  the  class  of  business — meats.  These  obvi- 
ously are  in  constant  demand,  have  no  seasons,  can  be  turned 
into  money  in  a  few  days  at  the  longest,  and  are  steady  in 
price  and  the  value  certain.  Meat,  like  wheat,  is  "as  good  as 
gold." 

Next  the  date — recent.  Good.  But  it  is  uncertified. 
The  firm,  however,  bears  a  good  reputation  among  the  trade, 
are  well  regarded  by  their  own  banks,  and  the  reports  are  all 
favorable.  (Information  obtained  from  the  credit  files, 
through  correspondence  with  the  banks  where  they  keep  ac- 
count and  among  the  wholesale  meat  trade.) 

Ratio  of  quick  assets  to  quick  liabilities,  about  two  to  one. 
It  is  considered  in  the  meat  trade  that  one  and  a  half  to  one 
is  sufficient  for  reasons  above  noted;  and  this  firm  quali- 
fies with  a  margin  considerably  over  the  standard  set  by 
credit  men. 

Cash,  $164,000.  We  find  that  by  dividing  the  annual 
sales  by  300  (the  number  of  working  days  in  a  year)  that 
they  sell  about  $25,000  a  day.  Inasmuch  as  they  sell  for 
cash,  they  should  buy  for  cash  and  must  have  an  ample  bal- 
ance. The  cash  on  hand  amounts  to  six  days'  purchases  and 
owing  to  the  short  term  of  credit  this  is  sufficient.  There- 
fore, the  cash  balance  while  seemingly  large  is  not  too  large 
for  a  cash  business.  The  firm  has  no  bills  receivable.  Ac- 
counts receivable  are,  next  to  cash,  the  quick  assets  of  a 
firm.  They  represent  merchandise  gone  out  of  stock.  They 
are  merchandise  turning  into  cash.  The  volume  of  ac- 
counts receivable  indicates  the  credit  operations  of  the  firm. 
If  the  terms  of  credit  are  thirty  days,  they  should  not,  at  the 
most,  have  more  than  one-sixth  of  the  total  sales  on  their 
books,  and  this  would  be  extending  the  period  of  credit 
unduly. 

In  this  case  we  assume  that  the  credit  terms  are  not  over 
ten  days ;  cash  at  the  end  of  the  week,  most  likely,  and  there 
is,  therefore,  about  ten  days'  sales  on  their  books,  a  normal 
amount. 

Merchandise  in  this  case  represents  meats  and  other  food 
products  that  are  essentially  as  good  as  cash.  This  does  not 
always  obtain  in  merchandise  accounts  as  will  be  noted  sub- 
sequently; but  in  this  instance  we  pass  the  merchandise  item 


ESSENTIALS    IN    GRANTING    CREDIT  495 

with  but  a  single  deduction,  i.  e.,  that  they  have  about  two 
weeks'  supply  on  hand.  The  plant,  while  it  may  be  valuable 
for  its  terminal  or  water-front  location,  is  worth  the  ground 
value  only,  the  buildings  being  little  suited  for  anything  else. 
We  discard  it  entirely. 

Bills  payable,  $391,000;  accounts  payable,  $41,000,  or 
less  than  two  days'  sales.  The  firm  evidently  borrows  in  the 
open  market  on  its  single-name  paper  and  with  the  proceeds 
buys  cattle  for  cash,  and  the  statement  so  indicates.  They 
have  borrowed  about  one-half  their  net  worth,  and  from 
every  standpoint  this  statement  presents  a  healthy  condition. 

They  do  not  and  should  not  have  many  accounts  payable 
on  their  books.  They  borrow  to  pay  cash  and  this  firm  no 
doubt  does,  the  $41,000  representing  accounts  in  process  of 
audit. 

Capital,  $5,000,000.  Whatever  this  is,  in  the  present 
case  it  means  nothing,  for  the  net  worth  is  $770,000  and  they 
do  not  show  assets  to  balance  the  statement  if  capital  be  in- 
cluded. You  may  loan  them  or  buy  their  paper  with  assur- 
ance that  it  is  good. 

The  surplus  in  any  corporate  statement  simply  repre- 
sents the  difference  between  assets  and  liabilities  at  the  values 
stated.  It  is  not  a  cash  surplus  unless  the  assets  realize  their 
listed  value,  being  merely  an  adjustment  to  make  the  state- 
ment balance;  and  the  surplus  might  be  eliminated  through 
a  shrinkage  in  merchandise  valuation.  Reversely,  it  might 
be  created  by  an  overvaluation  of  merchandise.  But  in  a 
packer's  statement  it  would  be  nearly  a  cash  surplus,  al- 
though in  this  case  it  might  be  represented  in  part  by  the 
overvaluation  of  plant. 

STATEMENT  No.  2. 

Brown  $  Jones,  Wholesale  Grocers. 
October  1,  1914. 

ASSETS. 

Cash $410,000 

Accounts  receivable   1,021,000 

Merchandise    1,301,000 

$2,732,000 

Real  estate  $297,000 

Machinery  and  fixtures  62,000 

Good   will    2,000,000  2,359,000 

$5.091.000 


496  THE    PRACTICAL  WORK  OF   A   BANK 

LIABILITIES. 

Bills  payable   $930,000 

Accounts  payable   61,000 

Dividends  payable    45,000 

1,036,000 

Capital    $3,500,000 

Surplus    555,000  4,055,000 

Net  worth  (eliminating  good  will) $2,055,000  $5,091,000 

Ratio  of  quick  assets,  2.6 

Sales,  $10,360,000. 

Profits,  $252,000. 

Dividends,  $190,000. 

Certified  to  by  the  Accountancy  Co.,  as  per  their  audit,  October  10,  1914. 


COMMENT  ON  STATEMENT  No.  2 

First,  the  class  of  trade — food  stuffs,  in  constant  de- 
mand, profits  small  but  sure,  terms  reasonably  short,  and 
the  merchandise  quickly  turnable  into  money.  Not  so  quick- 
ly, however,  as  meat,  but  within  a  short  period.  Therefore, 
the  goods  are  essentially  money,  if  well  selected  and  staple, 
rare  articles  being  handled  only  on  order. 

We  note  that  the  statement  is  certified;  therefore,  it  is 
from  an  independent  source.  The  auditing  firm  is  well 
known  for  its  knowledge  of  the  grocery  business,  and  gives 
particular  attention  to  inventory.  We,  therefore,  accept  it 
with  confidence. 

The  ratio  of  assets  to  quick  liabilities  is  2.6 — a  goodly 
ratio  in  this  business  and,  therefore,  we  start  off  well.  Two 
to  one  would  be  ample.  Cash,  $410,000,  enough  to  pay 
nearly  half  the  bills  payable,  or  six  times  the  accounts  pay- 
able. 

We  find  the  sales  to  be  $10,360,000,  or  about  $850,000  a 
month.  The  accounts  receivable  are  equal  to  about  five 
weeks'  sales  and  this  shows  that  thev  are  close  in  their  credits 

V 

and  collect  promptly.  The  terms  in  the  grocery  trade  are 
not  over  thirty  days,  cash  in  most  instances  and  a  week's 
credit  in  others.  The  merchandise  is  equal  to  about  six 
weeks'  sales  and  this  is  another  good  omen.  They  are  turn- 
ing over  the  stock  frequently. 

Against  total  quick  assets  of  $2,732,000  they  owe  only 


ESSENTIALS    IN    GRANTING    CREDIT  497 

$1,036,000.  Their  liabilities  are  in  the  main  for  money  bor- 
rowed on  their  notes — probably  single-name  paper  sold 
through  brokers.  Their  accounts  payable  amount  to  but 
$61,000.  This  is  as  it  should  be.  They  borrow — or  ought 
to — in  order  to  take  trade  discounts.  The  statement  indi- 
cates that  to  be  the  case.  It  could  be  certified  by  communi- 
cating with  the  trade.  They  should  not  have  accounts  pay- 
able in  large  volume  on  their  books.  These  are  doubtless  in 
process  of  payment,  and  may  be  eliminated  from  the  debts. 
The  dividend  is  probably  accrued  to  the  time  of  the  state- 
ment and  is  properly  listed  as  a  liability,  although  not  neces- 
sarily quick. 

The  capital  and  surplus  represent  the  net  worth — over 
four  million  (two  million,  eliminating  the  good  will),  and 
their  debts  are  but  one-quarter  of  the  net  worth. 

As  to  slow  assets  and  supporting  the  quick,  we  have  real 
estate  of  $297,000.  This  is  probably  in  the  wholesale  dis- 
trict, well  located  for  business  purposes  and  if  properly 
scaled  or  conservatively  appraised,,  is  allowable  at  that 
figure. 

Machinery  and  fixtures,  $62,000,  may  well  be  eliminated; 
for  such  is  special  machinery,  and  would  be  scrapped  in  case 
of  liquidation.  But  it  is  not  a  large  item,  and  may  be  disre- 
garded. 

Good  will,  $2,000,000.  Good  will  has  been  defined  as 
"the  tendency  of  trade  to  follow  established  lines."  It  may 
be  that  this  firm  has  valuable  trade-marks,  brands  of  canned 
goods,  coffees;  or  has  taken  over  such  from  other  concerns, 
issuing  stock  therefor,  and  it  depends  altogether  upon  what 
this  good  will  account  represents  whether  it  is  inflated  or 
not.  The  good  will  of  Ivory  soap,  Uneeda  biscuit,  and 
other  widely  advertised  articles  is  enormous  and  may  well  be 
capitalized.  This  good  will  may  be  in  the  same  class. 

The  firm  has  earned  about  seven  per  cent,  on  the  capital ; 
paid  dividends  of  about  five  and  one-half  per  cent,  and 
added  $62,000  to  its  surplus  during  the  year. 

But  aside  from  all  other  considerations,  we  have  over 
three  millions  of  good  assets  and  debts  of  only  a  million, 
and,  therefore,  this  firm  has  borne  the  acid  test  and  is  good 
Buy  their  paper  without  hesitation. 

33 


4,98  THE    PRACTICAL  WORK   OF   A   BANK 

STATEMENT  No.  3. 

Doe  $  Co.,  Wholesale  Milliners. 

July  1,  1914. 

ASSETS. 

Cash    .............................................        $56»000 

Bills   receivable    ...................................          15,000 

Accounts  receivable    ..............  .'  ................        209,001 


$484,000 


Machinery    ........................................  3,000 

Advances    .........................................  40,000 

Other   assets    ......................................  90,000                    133,000 

$617,000 
LIABILITIES. 

Bills  payable    .....................................  $75,000 

Accounts  payable  .................................  9,100 

Deposit  of  money  ........  .........................  1,000 

Commissions    .  .....................................  17,000 

Loan    .............................................  50,000                    152,100 


Net  worth   

Ratio  of  quick  assets  to  quick  liabilities,  3.18. 
Sales,  $2,489,000. 

COMMENT  ON  STATEMENT  No.  3 

I  have  next  selected  a  millinery  statement  because  of  its 
highly  fashionable  atmosphere,  its  seasonal  buying,  and  the 
deductions  that  it  invites.  Here  we  find  a  ratio  of  3.18 — a 
goodly  proportion — and  well  we  might.  I  do  not  know  the 
exact  terms  in  millinery,  but  such  goods  are  bought  for  two 
seasons,  the  spring  and  fall.  The  popularity  of  a  certain 
style  may  suddenly  change,  if  some  Parisian  model  appears 
at  the  races  with  a  new  creation  that  will  set  all  the  world 
of  fashion  agog,  and  place  millinery  houses  on  the  anxious 
seat,  wondering  if  their  advance  orders  will  be  cancelled  and 
a  season's  work  in  a  large  measure  discounted. 

Such  goods  are  sold  to  large  and  small  dealers  all  over 
the  country,  and  the  terms  of  credit  cannot  be  rigid,  depend- 
ing upon  the  weather  in  a  large  measure. 

While  the  profits  in  retail  millinery  are  large,  they  must 
necessarily  be  so,  for  the  busy  season  must  pay  for  the  dull. 
How  risky  is  a  stock  of  millinery  may  easily  be  understood. 
If  the  fashions  change,  or  the  women  do  not  take  to  the 
styles  of  the  house,  or  the  buying  has  been  without  good 
taste,  the  stock  may  be  unsalable  at  any  price. 


ESSENTIALS    IN    GRANTING    CREDIT  499 

We  note  that  the  statement  is  as  of  July  1st,  when  the 
buying  season  is  over,  and  the  statement  should,  therefore, 
show  merchandise  reduced,  accounts  receivable  large,  but 
maturing  rapidly,  the  cash  running  up  and  the  debts  run- 
ning down.  We  should  have  a  statement  at  the  height  of 
the  season  and  one  at  the  ebb,  to  determine  the  true  condi- 
tion at  the  present  time.  At  the  beginning  of  the  season 
the  stock  will  be  large,  cash  reduced,  accounts  receivable 
cleaning  up,  bills  and  accounts  payable  large,  or  just  the 
reverse  of  the  condition  at  the  end  of  the  season. 

Here  we  find  that  there  is  no  comparative  statement,  and 
so  we  do  the  best  we  can  with  the  one  in  hand. 

Sales  were  about  $2,500,000.  This  cannot  be  spread 
over  months,  for  they  are  as  aforesaid,  seasonal.  Allowing 
four  months  of  slack  seasons,  we  have  eight  months  of  ac- 
tivity, and  the  sales  would  then  average  $300,000  a  month. 
The  merchandise  is  less  than  a  month's  sales,  and  has  prob- 
ably been  cleaned  up  pretty  well  and  the  profits  taken.  The 
accounts  receivable  are  not  large  in  comparison  with  sales, 
about  one-twelfth.  Bills  receivable  are  not  large  and  should 
not  be,  such  goods  being  sold  on  book  account  and  not  on 
notes  of  hand.  If  larger  these  might  be  investigated  to  as- 
certain if  they  are  for  old  accounts.  They  might  be  for 
borrowed  money.  Inasmuch  as  the  merchandise  is  last  sea- 
son's stock,  we  eliminate  it  largely  and  cut  it  down  at  least 
one-half. 

No  careful  credit  man  will  loan  on  a  statement  showing 
assets  largely  in  merchandise.  It  is  not  goods  on  the  shelves 
that  pays  debts,  but  goods  sold  to  good  customers  represent- 
ed by  book  accounts ;  and  while  the  stock  should  be  ample,  it 
should  not  predominate,  with  little  cash  or  accounts  receiv- 
able. How  quickly  merchandise  can  be  turned  into  money 
depends  entirely  upon  the  goods.  Groceries  can  be  turned 
into  cash  in  a  very  short  period ;  a  stock  of  trimmings  for  my 
lady's  dress  in  a  time  that  is  doubtful.  Salable  goods — that 
is  the  crucial  point.  It  is  said  that  the  United  Cigar  Stores 
keep  only  a  few  boxes  of  each  brand  of  cigars  at  each  store. 
But  they  keep  ordering  as  fast  as  the  stock  goes  down,  and 
the  sales  sheet  of  one  day  is  the  order  sheet  for  the  next. 
They  know  how  to  turn  stock.  This  is  a  business  asset. 

Reducing  the  stock  by  half,  we  then  have  net  quick  as- 
sets of  $384,000,  and  allow  $50,000  for  shrinkage  in  collec- 


500 


THE    PRACTICAL   WORK   OF   A   BANK 


tions.  Against  this  we  have  hills  and  accounts  payable  ot 
$84,000,  commissions  of  $17,000  probably  due  salesmen  and, 
therefore,  quick  liabilities,  and  a  loan  of  $50,000.  This 
should  also  be  investigated  to  see  to  whom  it  is  due,  and 
when.  There  is  also  the  deposit  of  $1,000  from  employees, 
probably,  and  if  larger  this  would  be  an  element  to  consid- 
er, but  even  so,  for  debts  of  $152,000  we  have  twice  that 
amount  in  liquid  assets  and  this  makes  a  good  statement. 
But  the  character  of  the  goods  makes  care  necessary,  and 
the  point  to  be  emphasized  is  the  season.  This  stock  may  be 
wholly  unsalable  next  season,  and  if  so,  it  is  a  dead  loss.  A 
ratio  of  three  to  one  is  not,  therefore,  unduly  large  for 
safety's  sake. 

STATEMENT  No.  4. 

The  Brass  Bed  Company. 

February  1,  1914. 

ASSETS. 

Cash    $411,000 

Bills  receivable    271,000 

Accounts  receivable    712,000 

Merchandise    1,547,000 


Real    estate    $1,254,000 

Machinery   and  fixtures    1,072,000 

Investments    134,000 

Patents    1,376,000 

Other  assets    88,000 


LIABILITIES. 

Bills  payable   $1,187,000 

Accounts  payable 36,000 

Capital    $4,000,000 

Reserve 252,000 

Surplus  and  profits  1,390,000 


$2,941,000 


3,924,000 
$6,865,000 

$1,223,000 

5,642,000 
$6,865,000 


Ratio  quick  assets  to  quick  liabilities,  2.4. 
Net  worth,  $4,266,000. 
Sales,  $6,150,000. 
Profits,  $550,000. 
Dividends,  $306,000. 

COMMENT  ON  STATEMENT  No.  4 

We  note  first  that  the  firm  has  taken  considerable  in  notes 
from  its  customers.  If  it  issues  paper  on  the  market,  these 
should  be  in  its  possession,  for  two  kinds  of  paper  (single- 


501 

name  and  receivables)  should  not  be  on  the  market  at  the 
same  time.  It  evidently  sells  both  on  book  account  and 
note;  but  the  bills  receivable  should  be  investigated  to  as- 
certain if  they  are  good,  if  given  for  old  accounts  or  re- 
newed. A  statement  might  be  asked  for  giving  the  maturity 
of  these,  classified  into  thirty,  sixty  and  ninety  days,  and 
whether  for  old  or  new  invoices. 

While  bills  receivable  are  notes  received  by  the  firm  in 
payment  of  bills,  it  depends  altogether  upon  the  nature  of 
the  business  whether  they  should  be  in  evidence.  In  a  de- 
partment store  selling  for  cash  or  on  charge  account,  we 
should  find  but  few,  if  any,  of  these  items,  for  if  so  they  have 
been  taken  for  accounts  hopeless  of  collection  by  the  regular 
methods.  If  the  concern  were  a  lumber  company,  an  agri- 
cultural machinery  company,  which  sell  largely  on  these  in- 
struments, we  may  expect  to  find  them  in  large  volume  and 
properly  so;  but  not  in  a  cash  or  semi-cash  concern. 

For  instance,  in  raw  silk  the  terms  are  six  months'  note, 
and  we  may  expect  to  find  receivables  in  quantities,  and  it 
becomes  needful  for  the  credit  man,  as  aforesaid,  to  know 
the  terms  of  business  in  order  to  pass  upon  these  items  in- 
telligently. 

Receivables  should  never  be  for  loaned  money;  for  why 
should  a  firm  lend  and  borrow  at  the  same  time  ?  They  may 
be  given  by  the  partners,  or  interested  parties,  and  if  so  they 
are  doubtful ;  at  any  rate,  they  are  not  a  good  asset. 

The  accounts  receivable  are  about  one-ninth  of  the  sales, 
and  the  two  items — bills  receivable  and  accounts  receivable — • 
represent  about  two  months'  sales,  showing  that  these  items 
are  not  unduly  large,  the  terms  in  furniture  being  upwards 
of  two  months. 

Merchandise,  $1,547,000.  This  will  also  admit  of  test. 
Is  it  raw  material,  or  manufactured  articles,  or  both?  When 
was  it  inventoried?  By  whom?  This  is  a  large  item,  and 
amounts  to  one-quarter  of  a  year's  sales.  It  is  probably 
brass  or  iron  tubing,  metals  of  other  kinds,  and,  therefore, 
has  a  value  as  raw  material  in  itself.  But  merchandise  being 
so  uncertain  in  its  valuation,  such  a  large  item  would  bear  in- 
vestigation before  placing  much  faith  in  it. 

We  then  have  real  estate — the  plant,  of  one  and  a  quar- 
ter millions.  This  doubtless  is  valuable  for  its  location,  but 
should  have  been  appraised  by  an  independent  appraiser  and 


502  THE    PRACTICAL   WORK   OF    A   BANK 

properly  scaled  down  to  at  least  its  market  value,  irrespec- 
tive of  its  value  as  a  factory  for  a  particular  purpose.  Credit 
men  do  not  lay  much  stress  upon  real  estate,  and  especially 
factories. 

Machinery  and  fixtures,  $1,072,000 — another  large  item. 
This  is  special  machinery  and  has  little  value  except  for  its 
particular  purpose.  We,  therefore,  discard  it  entirely  from 
our  calculations.  Patents,  $1,376,000.  These  may  be  very 
valuable  and  may  be  properly  capitalized.  How  long  have 
they  to  run?  Is  there  any  litigation  concerning  them  that 
may  cost  the  firm  heavily  if  adverse  decisions  are  rendered? 

Investments  and  other  assets,  $232,000.  These  should 
be  scheduled  before  accepting,  to  ascertain  what  they  are, 
for  they  may  be  of  doubtful  value  in  the  statement.  Bonds 
of  allied  concerns  and  the  like  are  questionable  at  times,  but 
often  valuable  for  the  business  they  control. 

We  note  on  the  liability  side  that  the  firm  has  borrowed 
$1,187,000  presumably  on  its  paper  in  the  market.  The  ac- 
counts payable  are  not  large,  $36,000,  and  it  quite  likely 
takes  advantage  of  the  cash  discounts.  It  has  cleaned  up  its 
bills  as  rapidly  as  could  be  expected.  But  eliminating  all 
slow  assets,  we  have  quick  assets  of  $2,941,000  to  meet 
quick  liabilities  of  $1,223,000,  and  it  is  in  a  healthy  condi- 
tion, able  to  stand  considerable  strain,  with  ample  cash  on 
hand,  and  allowing  all  assets  at  their  listed  amount,  a  net 
worth  of  over  five  millions,  or  five  to  one  of  liabilities. 

Of  course  in  the  credit  files  there  will  be  letters  from 
banks  which  have  accounts  with  these  firms,  letters  from 
the  trade  connections,  stating  whether  they  take  their  dis- 
counts steadily  or  not,  their  general  habits  of  pay,  and  the 
moral  standing  of  the  members  of  the  various  firms,  their 
living  habits  and  general  reputation  in  the  community. 

The  above  is  only  a  partial  review  of  the  credit  man's 
mental  processes  as  he  glances  over  a  statement;  but  I  have 
in  a  small  measure  endeavored  to  indicate  his  train  of 
thought,  as  he  passes  judgment  on  a  request  for  a  loan. 

NOTE:  For  further  treatment  of  borrower's  statements,  see  "Commercial 
Paper"  by  the  same  author. 


CHAPTER  XIV. 

THE  BANK  MAN  IN  THE  MAKING 

If  the  average  bank  man  were  asked  why  he  chose  bank- 
ing as  a  career,  he  would  doubtless  confess  that  he  didn't 
choose  it,  but  just  drifted  in.  This  desire  to  work  in  a  bank, 
so  frequently  found  in  young  men,  is  easily  accounted  for, 
for  there  is  an  attraction  in  banking  which  seems  to  appeal 
to  young  men,  and  the  impression  is  quite  rampant,  errone- 
ous though  it  may  be,  that  the  hours  are  short,  the  pay  good, 
and  the  work  easy. 

He  may  have  done  as  one  young  man  did,  look  into  the 
fine  banking  room  and  becoming  impressed  with  the  gran- 
deur of  the  marble  and  the  bronze,  decided  that  it  was  "good 
enough  for  him,"  and  got  a  job  therein.  Or,  he  may  have 
seen  the  sign  on  the  doors:  "Open  from  10  to  3 — Saturdays 
until  12,"  and  become  impressed  with  the  shortness  of  the 
hours,  as  another  did,  and  chose  his  calling  accordingly. 

THE  BANKER  IN  FICTION 

The  banker  is  pictured  in  fiction  as  a  tall,  slim,  dignified, 
gracious  individual,  with  gray  hair  and  a  beard,  given  to 
patting  children  on  the  head,  and  doling  out  pennies  or  dis- 
pensing advice  in  matters  personal,  religious  or  political 
with  equal  ease — a  leading  citizen,  if  you  please,  with  a  halo 
about  his  head  and  a  fat  wallet  in  his  pocket.  And,  making 
up  his  mind  that  he,  too,  would  like  to  raise  a  beard,  wear  a 
halo,  dispense  pennies  and  free  advice,  and  carry  a  fat  wal- 
let, many  a  youth  has,  undoubtedly,  sought  this  profession 
as  affording  all  these  luxuries ;  but  whether  his  dream  comes 
true  or  not  depends  largely  upon  the  man. 

THE  BANK  MAN'S  WAGE 

No  doubt  banking  offers  exceptional  opportunities  for 
making  money.  The  banker's  name  stands  for  something; 
his  support  lends  weight  to  an  enterprise.  Therefore,  he  is 
let  in  on  a  great  many  projects  and  by  virtue  of  his  finan- 


504  THE    PRACTICAL  WORK  OF   A   BANK 

cial  training  becomes  a  good  judge  of  investments  and  is 
able  to  distinguish  between  good  risks  and  bad.  He  some- 
times fails  to  distinguish  between  the  two,  speculates  with 
his  own  and  the  bank's  funds  and  the  old  story  follows.  But 
the  man  who  enters  banking  "for  the  money  that's  in  it"  will 
either  fail  to  realize  his  ambition  or  miss  the  chief  charm  of 
the  profession;  for  success  here  cannot  be  measured  by  the 
dollar  standard. 

Banking  is  a  dignified  calling  and  worthy  of  any  man. 
It  is  a  field  of  exceeding  usefulness ;  and  the  banker  imbued 
with  high  motives  and  a  kindly  heart  can  do  much  good  in  a 
quiet,  unostentatious  way. 

Banking  is  not  a  bed  of  roses,  and  the  banking  world  is 
full  of  disappointed  and  dissatisfied  men.  There  are, 
perhaps,  more  disgruntled  men  than  contented.  The  officers 
seem  to  have  such  an  easy  time.  They  receive  callers ;  write 
letters ;  attend  meetings ;  examine  statements ;  draw  fat  sala- 
ries; attend  conventions;  play  golf.  And  all  would,  there- 
fore, be  officers.  But  many  a  grumbling  clerk  forgets  that 
some  men  are  paid,  not  for  doing  things,  but  for  knowing 
how.  Even  the  gentle  art  of  saying,  "How  do  you  do!"  is 
an  asset  to  their  bank,  and  likewise  the  gentler  art  of  saying 
"no";  and  not  all  men  are  artists  at  shaking  hands  and 
saying  "no." 

The  average  messenger  in  a  large  bank  receives,  as  a  be- 
ginner, about  $25  per  month.  From  this  he  will  be  advanced 
as  he  progresses  until  he  receives  about  $1,000  a  year  (or 
less)  to  run  a  ledger.  Tellers  in  New  York  receive  from 
$1,800  to  $4,000,  depending  upon  the  bank,  the  length  of 
service,  the  size  and  spirit  of  the  institution.  Twenty-five 
hundred  would,  perhaps,  be  a  fair  average.  In  country 
towns  ten  to  twelve  hundred  dollars  is  a  good  salary  for 
tellers  and  bookkeepers,  and  from  two  to  three  thousand  is 
considered  good  pay  for  officials.  The  president  frequently 
gets  nothing  but  honor;  but  in  large  places  he  is  the  highest 
paid  official,  and  will  receive  from  five  to  twenty-five  thou- 
sand, a  few  in  very  large  banks  passing  this  figure,  but  the 
number  is  small. 

Two  SCHOOLS  or  BANKING 

Bankers  may  be  divided  into  two  schools,  those  who  be- 
lieve experience  is  the  great  (and  only)  teacher,  and  those 


THE    BANK    MAN    IN    THE    MAKING  505 

who  believe  in  a  combination  of  experience  and  book  learn- 
ing. The  former  must  go  through  an  experience  before  they 
can  profit  by  it;  must  have  law  suits  in  order  to  learn  the 
law,  and  losses  in  order  to  learn  how  to  invest.  They  will 
point  with  pride  to  the  fact  that  they  never  had  a  loss  and 
turn  around  and  make  a  wrongful  payment  that  a  little 
book  knowledge  would  have  prevented.  They  will  rule  on 
legal  questions  according  to  a  decision  discarded  by  the 
courts  years  ago.  They  will  cite  law  that  is  not  law  because 
it  is  bad,  and  law  is  never  bad — although  legislation  may  be. 
They  must  burn  their  fingers  to  prove  that  fire  is  hot.  They 
do  things  a  certain  (foolish)  way  for  no  better  reason  than 
that  they  have  always  done  them  that  way,  and  become  old 
in  the  service  before  they  learn  that  books  are  men's  experi- 
ences, and  through  the  experience  of  others  we  can  avoid 
the  pitfalls  ourselves. 

The  other  school  says:  "Give  us  books.  Tell  us  what 
other  men  have  done  and  gotten  into  trouble,  that  we  may 
be  on  guard  against  the  same  things.  History  repeats  itself. 
What  happened  in  one  bank  may  happen  in  another;  there- 
fore, show  us  the  law — not  that  we  would  be  lawyers — but 
just  good  bankers,  and,  therefore,  keep  out  of  court.  Teach 
us  economics  that  we  may  understand  the  trend  of  events 
and  discern  the  signs  of  the  times;  grammar  that  we  may 
write  good  letters ;  credits  that  we  may  make  safe  loans ;  the 
theory  of  money  that  we  may  understand  currency  problems, 
and  history,  that  we  may  judge  the  present  in  the  light  of 
the  past." 

And  you  do  well  if  you  decide  to  take  up  this  calling,  to 
join  the  latter  school,  for  these  are  the  men  whose  future  is 
before  and  not  behind  them — the  optimists  who  know  how 
to  say  "good  morning!" 

Of  necessity  the  beginner  will,  as  a  rule,  have  to  start 
at  the  bottom.  Let  experience  go  hand  in  hand  with  study. 
You  will  better  understand  what  you  read  about  if  you  are 
doing  the  very  things,  than  if  you  attempt  to  get  the  theory 
without  the  practice.  And  if  you  get  into  a  good  bank, 
work  hard,  keep  your  eyes  and  ears  open;  spend  your  spare 
time  along  definite,  constructive  lines;  it  may  be  that  you 
will  get  to  the  top,  for  the  top  is  never  crowded. 

If  the  question  were,  therefore,  put:  Shall  I  go  into 
banking?  The  answer  would  be:  That  depends  upon  you 


506  THE    PRACTICAL   WORK   OF    A    BANK 

and  the  bank;  first,  you  and  then  the  bank.  If  you  have  not 
the  banking  instinct  and  temperament — a  liking  for  the 
things  the  banker  must  know  and  do,  then  the  best  training 
school  in  the  land  cannot  make  you  a  banker,  but  simply  a 
bank  clerk;  and  if  the  bank  has  not  the  environment  and  the 
opportunities  that  make  a  banker,  a  good  man  will  not 
linger  long  after  he  discovers  it. 

COUNTRY  BANK  OR  CITY  BANK? 

The  question  arises  whether  a  country  bank  is  a  better 
training  school  than  a  city  bank.  It  depends.  If  the  coun- 
try bank  is  a  well-managed  bank,  broad  in  its  views,  liberal 
in  its  outlook,  progressive  in  its  management,  not  hidebound 
by  tradition  and  a  slave  to  the  laws  of  the  Medes  and  Per- 
sians, and  the  clerk  is  allowed  the  freedom  of  the  place  and 
permitted  to  learn  the  workings  of  the  whole  bank,  he,  no 
doubt,  will  acquire  a  better  loiowledge  of  banking,  as  a 
whole,  than  if  he  were  to  go  into  a  highly  departmentized 
bank  and  work  from  one  department  to  another,  acquiring 
only  part  information  at  a  time.  On  the  other  hand,  he  will 
get  a  broader  outlook  in  the  city  bank,  and  cosmopolitan 
advantages  that  smaller  places  do  not  afford.  Let  him, 
above  all  things,  unite  with  the  American  Institute  of  Bank- 
ing and  take  its  study  courses,  a  very  excellent  training  in 
the  theory  and  practice  of  banking. 

Whether  he  becomes  merely  a  machine  or  not,  and 
whether  he  succeeds  or  not,  depends  as  much  upon  the  man 
as  upon  the  bank;  but  if  success  comes  it  will  be  a  combina- 
tion of  both ;  and  if  he  fails  it  may  be  the  fault  of  both.  And 
failure  is  a  relative  term.  Some  failures  are  successes,  after 
all.  I  would  rather  be  a  Philip  in  the  First  National  Bank 
of  Boston  than  certain  dead  men  who  once  were  bank  pres- 
idents. 

PROPER  TRAINING  ESSENTIAL  TO  SUCCESS 

The  ultimate  success  that  the  bank  clerk  attains  will,  in 
a  very  large  measure,  be  governed  by  the  training  school  in 
which  he  works.  If  he  makes  a  failure,  it  may  be  because  he 
did  not  have  the  discipline  and  the  coaching  that  he  should 
have  had  in  early  days.  If  a  young  man  in  the  bank  is  do- 
ing things  he  should  not  do,  in  or  out  of  the  bank,  the  proper 


THE    BANK    MAN    IN    THE    MAKING  607 

course  is  not  to  discharge  him,  but  to  take  him  in  hand  and 
show  him  the  error  of  his  way,  and  correct  him.  If  he  will 
not  learn,  then  severer  measures  may  be  necessary.  As  a 
boy  he  will  not  see  things  in  the  light  of  the  man,  but  the 
man  can  see  things  in  the  light  of  the  boy ;  and  every  banker 
owes  it  to  himself,  as  a  trainer  of  men,  and  as  a  man  who 
should  be  interested  in  boys,  to  give  them  proper  encourage- 
ment. 

If  he  is  frittering  his  time  away  after  bank  hours,  a 
course  of  study  may  be  suggested.  If  he  shows  an  apti- 
tude for  any  one  branch  of  banking,  give  him  a  chance.  A 
boy  with  an  overwhelming  ambition  to  know  and  to  do  needs 
right  direction,  or  he  will  be  likely  to  scatter  his  energies. 
The  banker  owes  it  to  himself  and  to  his  men  to  find  out  the 
things  that  interest  them;  to  encourage  them  in  the  right, 
and  advise  them  if  in  the  wrong.  If  a  man  shows  an  inclina- 
tion to  study,  see  that  he  studies  the  right  things — the  things 
the  banker  should  know.  Make  it  easy  for  him  to  get  in- 
formation. Subscribe  to  the  financial  papers.  Put  them 
where  the  bank  men  can  get  them.  Do  as  one  bank  in  New 
York  does,  subscribe  for  the  best  magazines  in  sufficient 
quantities  so  that  all  may  read  who  care  to,  and  be  sure  to 
read  them  yourself. 

PIVOTAL  POINTS  IN  THE  BANK  MAN'S  LIFE 

But  whatever  the  motive  that  induced  our  man  to  become 
a  bank  clerk,  his  banking  career  will,  if  he  is  successful,  di- 
vide itself  into  three  periods  or  epochs :  the  period  of  observa- 
tion; the  period  of  application,  and  the  period  of  adminis- 
tration. Just  where  one  begins  and  the  other  ends  is  not 
easy  to  say.  He  can  make  these  periods  long  or  short  as  he 
will ;  and  whether  or  not  his  career  shall  end  in  the  period  of 
close  application  where  every  to-day  is  a  yesterday  and  every 
to-morrow  will  be  another  to-day,  is  for  him  to  determine. 

Little  things  often  turn  the  current  of  life's  events  for 
better  or  for  worse,  and  no  man  can  tell  when  an  event,  in- 
signjficant  in  itself,  may  make  or  mar  his  future.  Therefore, 
let  us  not  despise  the  little  things,  for,  as  Michael  Angelo 
observed,  "trifles  make  perfection,  and  perfection  is  no 
trifle."  And  so,  let  every  day  be  the  great  day,  and  every 
chance  the  great  chance,  for  if  the  task  be  worthy,  it  de- 


508  THE   PRACTICAL  WORK   OF   A   BANK 

serves  our  very  best,  and  good  work  well  done,  like  the 
chickens,  surely  comes  home  to  roost. 

LEARNING  BY  DOING 

The  period  of  observation  begins  as  he  enters  the  bank 
as  a  runner.  Here  he  will  learn  to  do  by  doing.  If  he  is  a 
good  messenger,  he  will  have  no  other  ambition  than  to  do 
his  daily  work  well,  and  whatever  banking  knowledge  he  ac- 
quires, will  not  be  from  books,  but  from  practice.  He  will 
not  even  know  the  reason  why  he  does  some  things — it  is  not 
essential  that  he  should;  he  will  do  as  he  is  told,  simply  be- 
cause obedience  is  the  order  of  the  day.  But  as  he  works  his 
way  up  through  one  department  after  another,  he  will  ac- 
quire the  practical  end  of  banking,  as  a  sponge  absorbs 
water,  without  effort,  and  in  due  course  will  come  into  the 
period  of  close  application  where  the  mill  grinds  swiftly  and 
often  exceedingly  fine. 

As  bookkeeper,  teller,  loan  clerk,  or  what  not — occupa- 
tions requiring  concentrated  attention — his  time  will  be  fully 
occupied  with  detail  work,  monotonous  in  its  grind,  and 
often  severe  in  its  demands  upon  his  strength,  and  it  is  in  this 
period  that  he  often  longs  for  the  more  enjoyable  experi- 
ences of  banking  on  the  "sunny  side  of  the  street."  And  if 
in  the  period  of  observation  he  is  keen  and  alert,  and  in  the 
period  of  close  application  faithful  and  accurate,  the  time 
will  come  when  there  will  open  to  him  the  period  of  adminis- 
tration— the  goal  of  every  ambitious  bank  man. 

EVERY  MAN  CAN  BETTER  HIMSELF 

We  err  greatly  in  holding  out  to  Young  America  the 
hope  that  any  boy  can  be  President  of  the  United  States; 
for  as  a  matter  of  history,  less  than  forty  have  ever  achieved 
this  honor,  and  less  than  forty  will  during  the  present  cen- 
tury; for  while  it  is  not  an  impossible  goal,  it  is  an  improb- 
able achievement.  But  when  we  make  the  statement  that 
every  bank  man  can  better  his  condition,  improve  his  mental 
caliber,  and  increase  his  income,  we  state  a  fact  which  is 
borne  out  by  current  events  in  banking  history  every  day. 
And  when  the  banking  world  says  to  the  men  in  the  ranks, 
"You  can  climb,  if  you  will ;  you  need  not  stay  in  the  period 


THE    BANK    MAN    IN    THE    MAKING  509 

of  observation  very  long,  nor  work  in  the  grinding  school  of 
concentration  always,  but  you  can,  if  you  will,  lift  yourself 
round  by  round  into  the  happier  experiences  that  attend  the 
period  of  administration,"  it  offers  a  proposition  upon  which 
it  can  make  good. 


To  accomplish  this  desirable  result,  several  factors  must 
be  taken  into  consideration.  First  of  all,  the  man  must  have 
a  definite  aim,  and  worthy;  for  if  it  is  not  definite,  his  ener- 
gies will  be  scattered,  and  if  it  is  not  worthy,  he  cannot  or 
ought  not  give  it  his  best  endeavor.  Better  to  aim  at  the 
moon  and  hit  a  church  steeple  than  to  aim  at  a  barn  door  and 
hit  nothing.  The  human  mind  is  ever  open  to  distractions 
and  is  apt  to  follow  the  line  of  least  resistance,  and  because 
it  is  so  difficult  to  resist  the  tendency  to  mental  wandering, 
a  capacity  for  definite,  constructive  work  is  one  of  the  great- 
est conquests  a  man  can  make  over  himself. 

Much  of  our  reading  is  merely  mental  dissipation  and 
what  we  need  is  to  be  able  to  concentrate  our  attention  on 
one  subject  until  it  leaves  a  lasting  impression  upon  the 
mind.  It  is  better  to  know  a  few  things  well,  very  well,  than 
to  know  a  great  many  things  casually,  and,  certainly,  far 
better  than  to  know  a  great  many  things  that  are  not  so. 

The  unthinking  man  is  not  necessarily  a  dull  man;  he  has 
probably  occupied  himself  with  unimportant  things;  and  un- 
til he  gets  a  definite  aim  in  life — a  master  passion  as  it  were 
—he  will  never  rise  to  his  highest  level  of  achievement;  and 
if  that  passion  is  to  know,  he  will  either  find  a  way  or  make 
one. 

TAKING  HIMSELF  FOR  GRANTED 

The  great  temptation  of  the  average  man  is  to  take  him- 
self for  granted;  to  get  the  idea  that  because  he  can  do  to- 
day's work  as  well  as  can  be  expected  of  him,  at  least  so  well 
that  no  criticism  is  hurled  at  him,  he,  therefore,  has  done 
all  that  the  occasion  requires.  Particularly  is  this  true  if  he 
has  had  a  small  measure  of  success  without  unduly  exerting 
himself.  In  this  he  greatly  errs,  for  if  he  is  a  sensible  fellow 
he  will  not  be  satisfied  by  the  mere  fact  that  he  holds  down 
a  job— he  should  hold  it  up — giving  it  dignity  and  distinc- 


510  THE    PRACTICAL  WORK  OF   A   BANK 

tion  by  the  excellency  of  his  work.  And  more  than  this,  he 
ought  to  have  his  eye  on  the  job  ahead.  Many  a  man  owes 
his  success  to  the  fact  that  in  an  emergency  he  could  step  in 
and  do  the  work  of  the  man  ahead,  and  many  a  man  owes 
his  defeat  to  the  fact  that  when  the  opportunity  was  his,  he 
could  not  rise  to  meet  it.  A  great  opportunity  makes  a  man 
ridiculous  unless  he  is  prepared  for  it.  The  man  whose  hori- 
zon is  bounded  by  the  four  walls  of  his  cage,  and  who  can- 
not see  in  the  job  ahead  his  opportunity  will  live  to  regret  it. 
And  if  he  cannot  get  in  the  departments  higher  up,  let  him 
get  those  departments  in  him. 

This  taking  one's  self  for  granted  is  deceitful  in  the  ex- 
treme, and  such  an  one  is  apt  to  discover  too  late  that  he 
doesn't  know  what  he  thinks  he  knows;  and  many  of  the 
things  he  thinks  he  knows  really  aren't  so.  But  he  who 
would  succeed  in  this  war  of  brains  must  be  willing  to  put 
himself  to  the  test,  taking  nothing  for  granted,  and  demon- 
strate that  he  not  only  knows,  but  that  he  knows  he  knows 
what  he  knows,  and  what  he  knows  is  so. 

Many  an  energetic  bank  man,  ambitious  to  rise  in  the 
world,  grants  you  that  "knowledge  is  power,"  and  if  success 
could  be  bought,  would  pay  a  goodly  sum  for  it;  but  inas- 
much as  knowledge  is  not  a  commodity  measured  by  the 
dollar  standard,  the  toll  is  often  too  great.  Who  has  not 
seen  the  man  who  would  not  in  a  single  hour  like  to  learn 
some  of  the  deep  things  of  life,  and  willingly  would  he  give 
the  hour  and  the  teacher's  fee;  but  no  educator  can  in  an 
hour,  a  week,  or  a  year,  impart  the  information  it  has  taken 
him  a  lifetime  to  acquire.  And  until  our  bank  man  is  will- 
ing to  pay  the  price  in  years  he  cannot  hope  for  lasting  re- 
sults. 

DEFINITE  METHODS 

But  the  man  with  a  definite  aim  must  have  a  definite  way 
of  going  at  it,  else  the  definiteness  of  the  aim  will  be  futile  on 
account  of  the  scattered  energies.  It  is  simply  the  case  of 
the  shotgun  against  the  rifle;  one  scatters  many  shot — the 
other  sends  one  bullet  home.  Many  an  ambitious  bank  man 
is  willing  to  work  for  success,  but  needs  direction  as  to  how 
to  make  his  willingness  effective.  Ambition  often  needs 
proper  direction  or  the  ambition  is  apt  to  turn  into  despair, 
and  the  purpose  of  banking  education  is  to  direct  the  man 


THE    BANK    MAN    IN    THE    MAKING  511 

with  a  definite  aim  into  the  definite  methods  by  which  he  can 
achieve  a  definite  goal. 

WHAT  is  EDUCATION? 

Education  has  been  defined  as  a  process  by  means  of 
which  experiences  are  acquired  that  will  assist  in  rendering 
more  efficient  future  actions;  a  course  in  discipline;  a  sys- 
tematic development  and  cultivation  of  the  mind  and  other 
powers  by  examples,  experiences  and  impressions ;  or,  as  the 
German  has  it,  erziehen,  "to  draw  out."  But  whatever  the 
definition,  education  must  help  a  man  think;  to  be  orderly 
and  logical  in  his  thought  processes ;  accurate  in  his  observa- 
tion of  men  and  things;  discriminating  in  his  judgments  and 
charitable  in  his  conclusions. 

This  process  may  be  formal  or  informal.  Informal  edu- 
cation is  the  education  that  the  bank  man  obtains  through- 
out his  business  career  without  conscious  effort  to  this  end; 
experience,  if  you  please.  Such  knowledge  is  absorbed  with- 
out much  thought  or  definite  intent.  In  such  a  process  a 
man  is  like  a  child,  in  that  he  gives  matters  passive  attention 
and  the  activity  is  characterized  by  an  interest  in  the  process 
rather  than  in  the  finished  product.  He  is  absorbed  in  what 
he  is  doing  for  the  time  being  and  the  end  to  be  gained  does 
not  unduly  concern  him. 

EXPERIENCE  A  DEAR  TEACHER 

No  one  will  deny  that  experience  is  a  good  teacher.  The 
lessons  she  teaches  are  long  remembered;  but  the  trouble  is, 
she  is  a  slow  and  expensive  teacher  and  in  such  a  school,  one 
learns  only  those  things  with  which  he  has  come  into  contact, 
and  profits  not  by  the  experiences  of  others.  A  burnt  child 
dreads  the  fire  much  more  than  one  who  has  simply  read  of 
fires  in  books ;  but  the  trouble  is  the  scar.  And  he  who  learns 
only  in  the  school  of  bitter  experience  must  expect  to  become 
scarred  while  learning. 

The  great  trouble  with  this  form  of  education  is  that  it 
is  unsystematic.  It  fixes  the  experiences  that  happen  to 
come,  but  makes  no  provision  for  the  experiences  that  may 
come  and  are  unfamiliar.  And  more,  it  is  a  time  consumer 
and  wasteful.  Take  a  simple  illustration.  You  burn  your 


512  THE    PRACTICAL  WORK  OF   A   BANK 

finger.  Some  one  who  has  burned  theirs  and  found  sweet  oil 
effective,  promptly  prescribes  sweet  oil;  but  this  burn  may 
not  be  a  "sweet  oil  burn"  and  you  call  the  doctor.  He  has 
not  only  had  experience  with  burns  of  your  kind,  but  with 
others  as  well ;  moreover,  he  has  studied  burns  in  books.  He 
draws  not  only  upon  his  own  experiences,  but  upon  the  ex- 
periences of  others  and  immediately  knows  what  treatment 
your  burn  needs. 

This  is  as  true  in  banking  as  in  medicine.  The  banker 
who  relies  upon  his  own  experiences  is  helpless  when  his  ex- 
perience has  not  covered  that  particular  thing.  He  has  not 
learned  to  reason;  he  cannot  draw  upon  similar  experiences 
of  other  men ;  he  has  riot  trained  himself  to  put  facts  togeth- 
er and  draw  conclusions ;  to  apply  a  rule  to  a  set  of  facts  and 
derive  a  correct  solution.  We  would  not  belittle  experience 
— it  is  most  valuable ;  but  experience  should  be  supplemented 
by  study,  and  study  by  experience  to  make  the  all  round 

bank  man. 

i  <  i      '  '  •  . 

i        •    1,1  It        .    4  1 

EDUCATION  A  DEFINITE  PROCESS 


Formal  education  is  a  graduated,  definite  process.  It  be- 
gins where  it  finds  the  man,  gently  leads  him  step  by  step 
into  the  higher  realms  of  knowledge,  adapts  the  process  to 
the  man  and  remembers  his  shortcomings.  The  great  trou- 
ble with  so  many  energetic  bank  men  is,  that  not  knowing 
where  to  begin  they  plunge  blindly  in,  reading  anything  that 
bears  on  finance  and  banking;  and  this  reading  being  non- 
constructive  in  its  nature,  accomplishes  but  little.  It  is  high- 
ly essential  that  the  student  be  well  grounded  in  the  funda- 
mentals before  proceeding  with  the  superstructure.  This  is 
the  curse  of  ill-advised  home  study — it  is  unsystematic.  The 
man  starts  wrong  and  ends  wrong.  And  the  great  aim  and 
purpose  of  education  is  to  direct  the  man  into  those  channels 
that  will  produce  the  best  results  at  the  least  cost  of  time 
and  effort.  It  leads  him  from  the  simple  to  the  complex; 
from  the  concrete  to  the  abstract ;  supplementing  theory  with 
practice ;  the  law  with  the  application  thereof. 


Behind  every  scheme  of  education,  whether  it  be  a  college 
course  or  a  system  of  home  training,  there  are  two  control- 


THE    BANK    MAN    IN    THE    MAKING  518 

ling  motives,  both  of  which  are  worthy ;  first,  the  bread-and- 
butter  motive,  and,  second,  knowledge-for-its-own-sake  mo- 
tive. It  is  just  as  much  a  function  of  the  school  to  teach  men 
how  to  earn  a  living  as  it  is  to  teach  them  how  to  live;  and 
just  as  essential  to  teach  them  how  to  live  as  it  is  to  fit  them 
to  earn  a  living;  and  the  greater  the  knowledge,  the  greater 
the  earning  power,  provided  the  knowledge  be  of  the  right 
sort. 

We  live  in  the  age  of  efficiency.  The  machinery  of  to- 
day is  in  the  scrap-heap  to-morrow.  The  old  is  supplanted 
by  the  new.  Every  machine  must  do  its  best,  no  lost  motion 
— no  idle  time.  We  demand  in  every  line  of  activity  that  the 
man  be  capable.  We  pay  good  money  for  ability,  and  get 
it,  whatever  the  cost.  He  who  can  do  things  is  well  paid; 
he  is  well  paid  because  he  can  do  things.  We  do  not  always 
award  the  race  to  the  swift,  nor  the  battle  to  the  strong;  for 
behind  the  swiftness  there  must  be  sureness,  and  behind  the 
strength,  accuracy.  Of  what  avail  is  a  hard  blow  if  it  does 
not  hit  the  mark?  He  who  runs  swiftly  must  be  sure  of  his 
footing.  He  is  the  winner  in  the  battle  for  bread  who  can  do 
things  and  do  them  well. 

Carlyle  reminds  us  that  the  German  word  "koenig" 
(king)  comes  from  the  verb  "konnen"  (to  be  able) ;  there- 
fore, a  king  is  one  who  is  able — a  man  who  can ;  and  because 
banking  continually  demands  kings — men  who  can — he  who 
has  his  eye  on  the  future  must  not  ignore  this  call  for  effi- 
ciency, and  is  fully  justified  in  his  argument,  that  as  he 
knows  more  he  will  get  more;  and  when  he  knows  more 
about  one  particular  thing  than  anyone  else,  the  world  will 
rate  him  a  specialist  and  pay  him  specialist's  wages. 

The  second  motive  for  education  is  that  we  may  know 
the  truth,  for  the  search  for  truth  is  the  master  passion  of 
the  human  race.  Not  that  we  may  merely  hoard  facts  and 
figures,  for  such  hoarding  makes  us  misers  as  truly  as  the 
hoarding  of  money,  but  in  storing  up  information  there 
comes  power  in  reserve. 

And  in  this  storing  process  there  are  pleasures  keen  as 
the  world  affords.  The  enjoyments  of  the  mind  are  as  sure 
as  those  of  the  body,  and  the  great  truth  is,  the  mental  are 
the  more  enduring.  Who  will  be  so  bold  as  to  deny  that  the 
man  who  gets  his  amusement  in  a  good  book  has  not  as  gen- 
uine pleasure  as  he  who  must  find  his  amusement  in  dissipa- 

34 


514  THE    PRACTICAL   WORK   OF    A   BANK 

tion?  It  is  a  law  of  hygiene  that  he  who  would  do  his  best 
work  to-morrow  must  not  spend  to-night  in  riotous  living, 
and  the  prodigal  loses  at  both  ends.  The  story  of  the  night 
is  writ  large  in  the  work  of  the  next  day.  It  is  admitted 
that  to  learn  to  appreciate  knowledge  for  its  own  sake  is 
not  an  easy  task,  but,  nevertheless,  it  has  its  compensations. 
It  does  not  demand  its  toll  in  strength,  and  in  its  possession 
there  is  in  the  present,  satisfaction,  and  in  the  future,  power. 
Therefore,  let  the  bank  man,  while  striving  for  more  (or 
better)  bread  and  butter,  not  forget  that  while  he  should  be 
a  specialist  in  banking,  and,  therefore,  narrow,  he  may  and 
should  be  broad  as  well;  for  back  of  keenness  there  must  be 
breadth  or  the  keenness  becomes  ineffective.  And  when 
knowledge  for  its  own  sake  ceases  to  attract  its  devotees  the 
human  race  will  be  in  a  bad  way. 

THE  BANK  MAN'S  TWENTY-FOUR  HOURS 

To  the  bank  man  who  really  wants  to  know  there  is  no 
measure  of  time.  The  days  are  all  too  short  and  the  nights 
too  long  for  him  who  is  in  earnest  about  his  education.  Three 
o'clock — the  "quitters'  delight" — never  comes  to  the  man 
who  wants  to  know.  The  man  who  endeavors  to  excuse  his 
shortcomings  by  saying  "my  education  was  neglected"  offers 
an  excuse  as  full  of  holes  as  a  sieve.  Neglected  by  whom? 
Does  he  work  so  long  and  so  hard  that  he  never  has  a  mo- 
ment for  self -improvement?  Are  his  days  so  crowded  with 
work  that  his  nights  must  be  given  to  resting  for  the  next 
day?  Does  he  not  give  enough  time  to  the  newspaper  in 
five  years  to  give  him  a  college  education,  if  he  would  only 
get  started  right  and  use  well  the  spare  moments?  Could 
he  not,  if  he  would,  find  a  spare  hour  or  two  every  day  and 
a  few  at  the  end  of  the  week  for  definite,  constructive,  edu- 
cational work  ?  It  is  the  idle  man  who  has  no  time ;  the  busy 
man  has  all  the  time  there  is !  Do  you  not  know  that  in  two 
and  a  half  million  /ears  the  bodily  structure  of  the  human 
rfrce  has  remained  practically  the  same,  and  the  only  marked 
change  has  been  in  the  size  of  the  brain?  How  useless, 
therefore,  to  spend  time  in  a  vain  endeavor  to  improve  our 
looks;  we  are  not  responsible  for  our  faces  nor  for  the  size 
of  our  hats — our  head  ceased  growing  when  we  were  eight 
years  old — but  we  are  responsible  for  what  is  under  the  hat, 
and  brain  polish  was  never  so  cheap  as  now. 


THE    BANK    MAN    IN    THE    MAKING  515 

It  is  admitted  that  this  educational  work  is  not  easy.  It 
is  hard,  for  the  reward  lies  in  the  distant  and  often  misty 
future,  and  only  the  bravest  of  men  can  work  against  time. 
Play  is  always  easy,  for  its  reward — pleasure — is  immediate ; 
but  what  bank  man  wants  to  be  eternally  playing  just  be- 
cause it  is  easy?  We  need  the  inspiration  that  overcomes 
the  dragweight  of  despondency  which  is  so  apt  to  set  in  and 
tempt  us  to  say—  "Well,  what's  the  use?" 

And  what  shall  be  this  inspiration?  Shall  it  not  be  the 
secret  thought  that  somewhere  and  sometime  a  golden  op- 
portunity will  knock  at  our  door  and  we  must  be  ready?  It 
may  knock  only  once,  and  lasting  will  be  the  regret  of  him 
who  must  let  it  pass  by. 

There  is  a  secret  satisfaction,  impossible  to  describe,  when 
the  world  singles  you  out  as  a  "man  who  can,"  and  stamps 
your  self-denial  as  admirable,  your  zeal  commendable,  your 
enthusiasm  catching,  your  example  inspiring,  your  person- 
ality pleasing,  your  character  honorable,  your  work  worthy 
and  well  done;  and  as  evidence  that  this  is  no  vain  flattery, 
hands  you  out  the  coin  of  the  realm,  the  world's  best  evi- 
dence that  it  means  what  it  says. 

Men  usually  get  what  they  go  after,  if  they  go  at  it  in 
earnest;  and  you  can  get  what  you  go  after  if  you  go  after 
it  aright.  The  bank  man,  young  or  old,  who  resolves  with  a 
quiet  resolution,  as  unshakable  as  the  mountains,  that  he  will 
not  be  an  apprentice  forever;  that  he  will  not  spend  all  his 
days  bending  over  a  ledger;  that  his  measure  of  time  shall 
be  full  of  hard  work  for  future  success;  that  he  will  climb 
because  others  have  inspired  him  and  shown  him  how — is 
bound  to  win.  Are  you  that  man?  And  he  who  gets  the 
inspiration  of  an  ideal,  and  applies  himself  along  definite 
lines — reads  that  he  may  know,  and  knowing,  do,  will  not 
only  have  the  satisfaction  of  knowing  that  his  work  has  been 
well  done,  his  time  well  spent,  his  opportunities  improved, 
his  ambitions  rightly  directed,  but  will  receive  the  more  tan- 
gible evidence  that  he,  too,  is  a  king — because  he  can.1 


iMr.  Joseph  Chapman,  Jr.,  vice-president,  Northwestern  National  Bank. 
Minneapolis,  Minn.,  has  for  some  years  past,  at  each  convention  of  the  American 
Institute  of  Banking,  offered  a  cash  prize  for  the  best  paper  on  some  phase  of 
Institute  work.  The  foregoing,  prepared  by  the  author,  then  Secretary  of  New 
York  Chapter,  was  awarded  the  prize  at  the  Rochester  Convention,  September, 
1911,  and  is  here  presented  in  slightly  altered  and  enlarged  form.  In  its  original 
state  it  was  issued  as  a  pamphlet  on  Education  by  the  New  York  State  Bankers 
Association  for  distribution  in  New  York  State  only. 


516  THE    PRACTICAL   WORK   OF   A   BANK 

THINGS  THE  BANKER  MUST  KNOW 

Business  success  is  not,  like  war,  to  the  strongest,  but  to 
the  fairest,  the  just,  the  shrewd,  the  far-sighted,  the 
prophets  and  those  who,  in  the  struggle  for  money,  know 
the  game  and  play  it  well,  and  who  use  every  just  advan- 
tage to  their  own  profit. 

In  every  contest,  however  simple  or  complex,  there  are 
two  conditions  for  success:  (1)  A  knowledge  of  the  rules, 
and  (2)  skill  in  performance.  There  must  be  recognized  rules 
and  principles  to  govern  this  contest  for  business  success,  else 
men  would  trade  unfairly.  Some  would  get  more  than  they 
were  entitled  to,  and  defraud  the  weak  and  the  unwary; 
therefore,  we  have  business  law — the  evolution  of  the 
methods  and  customs  of  merchants  as  handed  down  through 
the  centuries — the  equitable  basis  of  men's  dealings  with  one 
another  then  and  now.  The  banker  must  know  this  law  and 
follow  it. 

Success  can  only  come  to  the  banker  as  he  understands 
these  rules  and  precedents;  the  functions  of  money;  the 
nature  of  business;  the  customs  of  business,  and  the  condi- 
tion of  business.  He  touches  business  life  very  intimately. 
His  success  is  coincident  with  the  success  of  others.  Only  as 
the  merchant  succeeds  can  the  banker  succeed. 

Every  banker  can  and  should  acquire  a  taste  for  banking 
law.  He  should,  above  all  things,  become  thoroughly  ac- 
quainted with  the  Negotiable  Instruments  Law,  for  this  is 
the  basic  law  in  each  of  the  forty-six  States  and  territories 
where  it  has  been  enacted,  and  it  will  settle  many  disputes. 
The  author  has  had  the  privilege  of  answering  some  of  the 
questions  that  have  come  up  in  banking  practice  as  viewed 
in  the  light  of  the  law,  and  as  a  general  proposition  it  may 
be  stated  that  the  banker  could  have  answered  his  own  query 
from  this  now  widely  adopted  law.  He  should  learn  to 
read  banking  cases  understandingly.  They  may  look  unin- 
teresting because  of  their  legal  dress;  but  they  can,  after  a 
little  experience,  easily  be  understood. 

He  must  know  how  to  profitably  employ  the  funds  in 
his  possession ;  whom  to  trust ;  how  to  buy  securities ;  how  to 
collect  checks;  how  to  run  a  bank.  And  knowing  the  law 
and  the  practice  he  becomes  a  good  banker. 

The  banker  must  know  how  to  employ  the  products  of 


THE    BANK    MAN    IN    THE    MAKING  517 

others — to  use  men.  He  cannot  do  it  all  himself;  he  must 
delegate  his  authority.  Therefore,  he  must  know  how  to 
get  results.  Banking,  like  business,  is  cooperative,  and  the 
bankers  must  work  together.  The  trouble  in  this  country 
has  been  they  have  worked  alone,  every  man  for  himself  and 
every  bank  for  itself.  We  have  needed  a  spirit  of  "get  to- 
gether" and  all  profit  by  the  getting  together. 

The  banker  should  know  banking  history.  "I  have  only 
one  guide,"  said  Patrick  Henry,  "and  that  is  the  light  of  ex- 
perience." The  banker  can  understand  the  present  better  if 
he  understands  the  past.  Banking  has  been  an  evolution. 
Past  dangers  are  guide  posts  to  present  safety.  What  hap- 
pened once  may  happen  again.  Panics  have  fundamental 
causes.  What  were  they?  Do  they  now  obtain? 

He  should  know  the  banking  practices  of  other  countries. 
The  Federal  Reserve  System  is  based  on  banking  practices 
and  experiences  the  world  over.  How  do  they  do  things  in 
England,  France  and  Germany,  and  what  is  the  secret  of 
their  success,  or  the  cause  of  their  failure?  How  does  the 
central  bank  do  its  work,  and  what  are  the  lessons  it  would 
teach?  This  is  banking  history  applied.  And  all  history 
can  be  applied.  It  repeats  itself. 


CHAPTER  XI'. 
THE  MORNING  MAIL 

The  mail  of  a  large  city  bank  is  enormous,  both  the  in- 
coming and  the  outgoing;  while  that  of  a  country  savings 
bank  is  insignificant.  It  is  valuable  mail  which,  if  lost,  en- 
tails a  large  amount  of  labor  to  replace.  The  wonder  is  so 
little  goes  astray.  The  mail  of  a  large  bank  will  amount  to 
upwards  of  3,000  letters  a  day,  containing  from  35,000  to 
40,000  checks,  often  representing  in  value  as  much  as  $30,- 
000,000. 

But  whether  large  or  small  it  must  have  prompt  atten- 
tion, for  it  may  contain  valuable  instruments  which  must 
have  immediate  attention,  and  promptness  is  a  virtue  for  its 
own  sake. 

Two-thirds  of  the  mail  arrives  during  the  night  and  in 
some  banks  is  handled  by  a  force  of  from  twelve  to  twenty 
men.  A  few  banks  have  men  who  work  in  shifts  all  night, 
so  that  the  work  is  fairly  well  in  hand  in  the  morning,  the 
mail  coming  in  during  the  night  being  collected  from  the 
postoffice  at  various  times  so  that  it  does  not  accumulate. 
Some  banks  are  opposed  to  night  work  and  so  handle  it  all 
in  the  morning.  The  Chase  National  Bank,  which  has  very 
extensive  connections  with  out-of-town  banks,  is  of  the  lat- 
ter class. 

The  incoming  mail  will  consist  of  (a)  letters  which  are 
in  the  form  of  deposits — remittances  for  credit  and  collec- 
tion, which  sometimes  contain  cash  items,  collection  items, 
coupons,  drafts  and  credit  inquiries;  and  each  must  have 
proper  attention;  (b)  acknowledgments  of  mail  received 
and  credits  made,  and  returns  of  uncollected  items;  (c)  spe- 
cial letters  regarding  loans,  investments,  credits,  and  other 
personal  matters  that  must  have  attention  by  the  executive 
force;  and  (d)  circulars,  magazines,  bond  offerings,  etc. 
There  is  also  mail  for  the  employees — a  practice  which  some 
banks  discourage,  others  encourage  and  others  just  permit. 

In  clearing-house  cities  the  mail  becomes  an  important 
part  of  the  day's  work  inasmuch  as  a  large  part  of  the  con- 
tents must  go  through  the  morning  clearings,  and  quick 
and  accurate  work  is,  therefore,  necessary. 

618 


THE  MORNING    MAIL  519 

Only  in  large  city  banks  will  it  be  necessary  to  have  a 
"mail  teller"  whose  duty  it  is  to  take  charge  of  the  mail, 
opening  it  promptly,  proving  its  contents,  and  despatching 
the  outgoing  letters.  The  work  is  sometimes  delegated  to  a 
junior  officer,  chief  clerk  or  other  employee  who  takes  charge 
of  the  force  and  keeps  the  machinery  working  smoothly. 
It  is  the  first  thing  that  requires  attention  in  the  morning, 
and  the  last  thing  at  night. 

The  contents  of  the  mail  will  classify  itself  into  (a) 
Checks  on  local  banks  to  go  through  the  exchanges,  and  are 
turned  over  to  the  paying  teller;  (b)  collections  in  the  city, 
turned  over  to  the  collection  or  note  teller;  (c)  checks  on  the 
bank  itself,  turned  over  to  the  bookkeeping  department;  (d) 
foreign  items,  turned  over  to  the  collection  or  transit  depart- 
ment; (e)  cash,  to  the  receiving  teller;  (f)  coupons,  to  the 
collection  department;  (g)  credit  inquiries,  to  the  credit  de- 
partment; (h)  other  correspondence  to  the  proper  officials 
and  employees ;  (i)  second-class  mail — too  often  to  the  waste 
basket. 

If  there  is  a  mail  teller,  of  course  he  charges  himself  with 
the  total  of  the  letters,  taking  credit  for  what  he  turns  over 
to  other  departments,  and  his  day  ends  as  it  begins,  with 
nothing. 

As  the  letters  are  opened  and  checked,  the  contents  are 
assorted,  clearing-house  and  other  cash  items  being  kept  in  a 
pile  by  themselves.  Cash  is  sometimes  left  with  the  letter 
until  the  clearing  items  are  disposed  of,  as  are  also  other 
collections  that  do  not  require  haste. 

Where  the  clearing-house  items  of  the  day  before  are 
separately  listed,  the  items  coming  in  through  the  mail  will 
be  added  and  will  constitute  the  "morning  additions."  In 
some  cases  where  it  is  impossible  for  the  work  to  be  com- 
pleted in  time  for  the  clearing,  all  large  items  are  taken  out 
and  the  others  held  over.  The  total  charged  out  to  the  va- 
rious departments  must,  of  course,  balance  with  the  total  of 
the  cash  items  received  in  the  mail.  The  letters  are  treated 
as  deposit  tickets,  sorted  out  according  to  the  divisional  ar- 
rangements of  the  bank,  and  may  first  be  listed  as  deposit 
tickets  in  a  scratcher  for  proving  purposes. 

The  mail  department,  or  the  mail  work,  is  identical  with 
that  of  the  receiving  teller's  work,  the  only  difference  being 
in  the  impersonal  depositors. 


520 


THE   PRACTICAL  WORK   OF   A   BANK 


The  routine  in  a  large  bank  is  described  by  Mr.  A.  K. 
Moore,  formerly  of  the  Chase  National  Bank,  New  York, 
as  follows  i1 

HANDLING  THE  MAIL  IN  A  LARGE  CITY  BANK 

"The  first  batch  of  letters  arrives  at  6.30  and  every  half- 
hour  afterward  up  to  9.30.  The  envelopes  are  cut  and  the 

MAIL  TELLER-PROOF  SHEET 

For  191 


DEBITS 

Folio 

ACCOUKT 

CREDITS 

Debit  Clerk 

Credit  Clerk 

Loan  Department 

Collection  Department 

Coupon  Department 

Paying  Teller 

Receiving  Teller 

Trust  Department 

Reorganization  Department 

Securities  Department 

Foreign  Department 

Transfer  Department 

Total  Departmental  Balances 

To-day's  Clearings 

Exchanges 

Suspense  Account 

Exchange 

Fifth  Avenue  Branch 

PROOF   OF   MAIL  TRANSACTIONS 


contents  placed  on  the  desks  of  all  the  clerks  so  that  on  the 
arrival  of  the  force  at  8.30,  each  man  has  his  share  in  front 
qf  him.  At  least  ninety  per  cent,  of  the  entire  force  of  the 
bank  has  to  work  on  the  mail.  As  the  letters  are  checked, 
the  contents  are  placed  in  four  piles — clearing-house  items, 
cash  routes,  such  as  items  on  bankers,  trust  companies,  mer- 
chants, commission  houses,  etc.,  checks  on  ourselves,  and  for- 
eign items. 


'Before  New  York  Chapter. 


THE  MORNING    MAIL  521 

"These  items  are  collected  by  boys,  each  boy  having  one 
kind  to  collect.  The  clearing-house  items  go  to  the  stamp- 
ers and  then  to  the  sorters,  and  finally  reach  the  machines 
where  each  bank  is  listed  and  the  amount  proved.  The  for- 
eign checks  go  to  the  head  of  the  department,  who  looks 
them  over,  keeping  a  careful  watch  for  items  that  should  not 
be  sent  to  us,  and  at  the  same  time  taking  memoranda  of 
exchange  charges.  They  are  then  sent  to  the  collection  de- 
partment, where  they  are  sorted  and  listed,  and  the  total 
charged  to  the  collection  clerk  in  the  daily  proof. 

"The  checks  on  ourselves  are  sorted,  listed  and  proved 
by  machines,  charged  to  the  check  department  and  placed 
with  the  exchanges  received  from  the  clearing-house,  the 
check  clerk  carrying  the  total  in  his  proof  at  night.  The 
route  items  are  sorted  into  the  different  routes,  being  listed 
on  sheets  for  the  use  of  the  mail  department  and  in  route 
books  for  use  of  the  note  teller.  A  proof  is  made  by  a  com- 
parison from  sheet  to  book,  and  the  total  charged  to  the 
note  teller. 

"As  this  work  must  be  finished  by  ten  o'clock,  you  can 
readily  see  that  some  strenuous  work  is  necessary.  Our  mail 
averages  about  1,500  letters  daily  except  Monday,  when  it 
is  double  that  figure.  In  checking  off  the  letters  any  item 
having  the  appearance  of  a  collection  is  left  in  the  letters  for 
examination  by  the  collection  clerk  or  the  note  teller,  who 
has  charge  of  the  city  and  foreign  collections. 

"As  the  letters  are  checked,  they  are  collected  and  taken 
to  the  mail  department,  where  the  collection  items  are  signed 
for  by  the  collection  clerk  and  note  teller.  They  are  then 
sorted  numerically  (our  accounts  run  by  numbers  and  not 
alphabetically  as  in  most  banks),  listed  in  credit  books,  and 
strung  by  cords  according  to  the  ledgers,  then  go  to  the 
bookkeepers  for  credit  on  the  ledgers. 

"During  the  day  they  reach  the  advice  department, 
where  their  receipt  is  acknowledged.  Later  on  they  reach 
the  check  department,  where  the  credit  is  made  on  the  ac- 
count current. 

"In  no  other  department  of  a  bank  is  there  so  much 
chance  for  error.  Our  correspondents,  having  no  knowledge 
of  our  way  or  mode  of  doing  the  inside  work  of  the  bank, 
the  chances  of  error  are  increased.  Errors  caused  by  the 
nountry  clerk  when  not  caught  by  his  city  brother  are  sure  to 


522  THE    PRACTICAL   WORK   OF   A   BANK 

make  trouble.     The  difference  has  to  be  located,  and  the 
hunt  for  a  difference  is  very  tiresome  and  tedious. 

"After  the  struggle  to  get  to  the  clearing-house  and  to 
give  to  the  different  departments  the  work  that  comes  with 
the  mail  (the  mail  department  is  the  source  from  which  all 
the  inside  daily  work  of  the  bank  originates),  to  find  late  in 
the  day  that  you  have  a  difference,  does  not  tend  to  fill  one 
with  the  sense  of  happiness  that  work  should  bring." 

Mr.  Moore  advocates  the  use  of  a  uniform  remittance 
letter,  and  cites  in  support  of  his  claim  the  following  inci- 
dent: 

"Some  time  since  we  received  a  letter  by  registered  mail 
from  a  bank  in  a  large  Western  city.  It  contained  five  items 
listed  as  cash  and  footed.  The  first  item  was  a  clearing- 
house check  for  a  large  amount.  The  second,  five  railroad 
bonds  listed  at  par,  to  be  sold  at  best  market  rate  (which  at 
that  time  was  considerably  above  par)  ;  third,  a  draft  on 
Tokio  with  a  bill  of  lading  attached,  calling  for  a  number  of 
crates  of  bicycles;  four,  coupons  not  yet  due;  fifth,  a  sight 
draft  on  a  flour  firm  with  bill  of  lading  attached  for  two 
hundred  barrels  of  flour,  the  draft  to  be  paid  on  arrival  of 
the  flour.  The  total  of  the  letter  was  about  $35,000  arid 
that  amount  was  charged  to  our  bank  by  the  Western  bank. 
When  we  had  passed  it  to  the  different  departments  to 
which  it  belonged,  it  looked  more  like  a  Chinese  laundry 
check  than  a  bank  remittance. 

"As  the  only  strictly  cash  item  in  the  letter  was  the  clear- 
ing-house check,  the  Western  bank  when  it  received  our  ac- 
knowledgment could  not  have  easily  located  it,  as  their  books 
showed  no  such  amount  forwarded  that  day.  Suppose 
through  our  efforts  in  this  direction,  in  a  year  from  now  the 
banks  having  a  large  out-of-town  business  should  receive  a 
quarter  of  their  mail  in  this  shape — all  strictly  cash  items 
listed  and  footed;  all  drafts  subject  to  payment  on  the  arri- 
val of  goods  listed  on  a  letterhead  stating  plainly  that  the 
item  is  for  collection  only,  with  a  request  to  report  payment 
by  a  collection  number;  all  foreign  items  reading,  "Tres  octo 
Trientes  dies  vista,"  or  written  in  foreign  languages;  cou- 
pons for  collection,  in  fact  all  items  not  payable  on  demand 
or  where  there  is  a  question  of  immediate  payment  should 
go  under  this  collection  heading. 

"If  a  request  for  a  discount  is  made  and  mailed  to  the 


THE  MORNING    MAIL  528 

discount  clerk,  or  personal  letter  to  an  officer;  if  all  ship- 
ments of  currency  for  credit  are  on  separate  letters  and  reg- 
istered or  expressed;  if  coupons — the  bane  of  a  bank  clerk's 
life — should  come  on  separate  letters  with  a  statement 
whether  they  are  to  be  taken  for  cash  or  collection;  if  stocks, 
bonds  or  securities  for  sale  were  listed  and  written  on  sepa- 
rate letters  and  not  on  the  bottom  of  a  cash  remittance  let- 
ter as  they  frequently  are;  if,  in  fact,  the  items  could  be 
handled  by  the  different  departments  without  the  original 
letter  going  from  one  department  to  another,  would  it  not' 
lessen  our  work  and  the  work  of  the  officers ;  would  it  not  les- 
sen the  number  of  apologies  written  by  officers  in  explana- 
tion of  clerical  errors?  I  know  it  would.  No  officer  in  a 
city  bank  would  ask  a  country  correspondent  to  change  its 
system  so  as  to  more  readily  conform  with  the  work  of  the 
system  in  the  city  bank.  My  idea  carries  with  it  little  or  no 
change  in  systems — only  suggests  a  little  care  that  should 
be  used  in  forwarding  cash  or  collection  items  so  that  the 
city  bank  could  be  reasonably  sure  of  the  wishes  of  its  coun- 
try customer.  It  would  make  little  or  no  more  work  and 
would  be  a  great  benefit  at  both  ends  of  the  banking  line." 

OUTGOING  MAIL 

The  proper  handling  of  the  outgoing  mail  of  a  bank  is 
one  of  its  most  important  features  and  one  in  which  great 
care  is  necessary.  How  often  it  has  occurred  that  a  bank 
iias  made  a  remittance  to  its  correspondent  in  a  reserve  city, 
calculating  to  have  a  certain  balance  to  draw  upon  for  an 
important  matter,  and  has  had  its  plans  delayed,  and  pos- 
sibly frustrated,  because  the  letter  was  returned  for  want  of 
postage,  or  had  been  mailed  to  the  wrong  bank. 

The  prompt  despatching  of  the  mail  is  important,  and 
its  prompt  arrival  equally  so.  Law  suits  sometimes  hang  on 
the  arrival  of  the  mail.  In  a  recent  case  it  was  attempted  to 
show  that  a  letter  containing  a  large  check  did  not  arrive  at 
the  time  claimed.  If  the  letter  arrived  on  Saturday  morn- 
ing, there  was  a  balance  sufficient  to  cover  it,  and  the  bank 
was  liable;  if  it  did  not  arrive  until  Sunday  morning,  the 
balance  was  insufficient  on  Monday  morning  and  the  bank 
was  not  liable.  But  the  evidence  strongly  pointed  to  the 
fact  that  the  bank  held  the  check  over  from  Saturday,  the 


524  THE    PRACTICAL   WORK   OF    A    BANK 

court  presuming  the  mails  to  have  arrived  in  due  course, 
which  the  postmarks  evidenced. 

While  no  one  is  infallible,  yet  such  a  systematic  arrange- 
ment can  be  made  as  to  reduce  the  liability  of  errors  to  a 
minimum. 

After  the  letters  are  written,  checked  and  copied,  they 
are,  in  large  banks,  turned  over  to  the  mailing  department  to 
mail.  They  must  go  to  the  right  banks,  with  sufficient  post- 


STAMPING    MACHINE AFFIXES   AND    REGISTERS   THE    STAMPS   AS    USED 

(Courtesy  National  Automatic  Machine  Co.,  Brattleboro^Vt.) 

age  attached.    The  postage  cost  must  be  ascertained  in  total 
and  in  detail. 

In  the  mailing  department  the  envelopes  for  the  one 
thousand  or  more  correspondents  are  addressed  by  the  ad- 
dressograph  in  lots  of  twenty-five  to  one  hundred  of  each, 
and  these  are  assorted  and  distributed  in  tills  or  files,  a  com- 
partment for  each  bank,  arranged  alphabetically.  In  some 
very  large  banks  a  separate  set  of  compartments  is  used  for 
various  divisions  of  the  United  States,  each  division  consti- 
tuting several  States.  The  letters  for  foreign  countries  have 
separate  compartments. 


THE  MORNING    MAIL  825 

Before  these  tills  or  compartments  is  a  wide  shelf,  at  a 
convenient  height  for  one  to  work  at  when  sitting  on  a  stool 
or  chair.  There  are  a  number  of  mailing  clerks,  each  at- 
tending to  only  a  portion  of  the  alphabet.  The  head  mail- 
ing clerk  knows  how  many  banks  each  of  his  assistants  has  to 
attend  to,  and  every  morning  issues  the  proper  amount  of 
two-cent  stamps  so  that  one  envelope,  the  one  on  top,  in  each 
compartment  receives  a  two-cent  stamp  and  is  ready  for  the 
final  work.  At  the  close  of  the  day  these  envelopes  are 
taken  from  their  compartments  and  placed  in  trays  on  edge, 
retaining  their  alphabetical  arrangement.  The  trays  are  of 
wood,  about  seven  inches  wide,  three  inches  deep,  and  two 
feet  long. 

As  fast  as  the  letters  are  completed,  they,  with  their  en- 
closures, are  given  to  their  respective  mailing  clerks.  These 
letters  are  placed  in  piles,  laid  flat.  The  mailing  clerks  sit- 
ting before  the  shelf,  or  a  table,  with  the  tray  at  their  right 
hand  and  the  piles  of  letters  and  enclosures  at  the  left  hand, 
select  their  envelopes  from  the  trays  according  to  the  address 
on  the  letters  and  proceed  to  fold  the  enclosures  in  the  let- 
ters, and  to  insert  them  in  the  envelopes,  these  then  being 
placed  in  another  tray. 

IMPROVED    METHOD    OF    FOLDING    LETTERS 

An  improved  method  has  been  adopted  by  many  banks 
in  folding  the  letters.  The  letters  with  their  enclosures  are 
folded  ready  for  the  envelopes  by  the  men  who  write  them, 
thus  greatly  reducing  the  danger  of  getting  the  enclosures 
in  the  wrong  letters.  Instead  of  the  letters  being  folded  as 
customary,  the  reverse  method  is  adopted,  with  the  writing 
on  the  outside  and  the  address  at  the  head  of  the  letter  show- 
ing prominently.  The  letter  writers  put  a  rubber  band 
around  each  letter  to  carefully  retain  the  enclosures,  and 
these  folded  letters  are  placed  in  trays  and  sent  to  the  mail- 
ing clerks.  From  the  address  on  the  outside  the  mailing 
clerk  readily  selects  the  proper  envelopes. 

As  the  envelopes  are  filled  they  are  taken  to  the  sealers, 
where  they  are  sealed  by  a  machine  run  by  electricity.  The 
letters  requiring  more  than  two  cents  postage  are  then  sep- 
arated from  the  others,  weighed,  and  placed  in  bins  that  are 
labeled  according  to  the  postage  required,  those  requiring 


526 


THE   PRACTICAL  WORK  OF   A  BANK 


only  two  cents  postage  having  already  been  placed  in  a  bin 
labeled  accordingly. 

A  great  many  postal  cards  are  used  as  mere  acknowledg- 
ments. If  there  are  letters  to  the  banks  to  which  any  postal 
cards  are  addressed  they  are  enclosed  in  the  letters.  If  not, 
they  are,  of  course,  mailed  with  the  one-cent  postage. 


"THE  NATIONAL"  AUTOMATIC  SEALING  AND  STAMPING  MACHINE — WITH  THIS  MACHINE 
IT  IS  POSSIBLE  TO  SEAL  AND  STAMP,  SUCCESSFULLY,   10,000  ENVELOPES  AN   HOUR 

OR  TO  SEAL  ALONE  15,000  AN  HOUR IT  WILL  HANDLE  ANYTHING  FROM,  A  SINGLE 

SHEET   OF  PAPER   TO   A   36-PAGE    CATALOGUE IT   COUNTS   AND   REGISTERS    EVERY 

STAMP    USED,   THUS    ELIMINATING    THE    LOSS    OF    STAMPS    THROUGH    MISUSE    OR 
CARELESSNESS 

(Courtesy  of  National  Automatic  Machine  Co.,  Brattle-born.  Vt.  i 


The  bins  mentioned  are  built  on  the  back  part  of  the 
mailing  table.  They  are  about  eighteen  inches  square,  made 
about  one  foot  high  at  the  back  and  low  in  front  (about 
four  inches).  They  are  generally  in  two  rows,  eight  or  ten 
in  a  row,  one  row  above  and  a  little  back  of  the  other,  each 
bin  being  labeled  with  the  proper  postage  denomination. 
One  is  marked  for  the  registered  mail. 

It  often  occurs,  particularly  on  the  last  day  of  each 
month,  that  many  packages  must  be  mailed  requiring  large 


THE  MORNING    MAIL 


527 


envelopes.  These  are  sorted  out  and  given  to  a  clerk  who 
attends  to  that  especially. 

The  mail  having  been  sealed  and  weighed,  and  dis- 
tributed to  the  bins,  stamps  are  now  issued  by  the  head  mail- 
ing clerk  for  all  extra  postage  (over  the  two  cents).  The 
stamping  is  then  completed,  the  letters  are  put  up  in  pack- 
ages of  fifty  in  each  bin,  and  then  the  counting  for  the  proof 
of  the  postage  takes  place.  This  being  completed,  and  the 
statement  made,  the  mail  is  ready  for  the  postoifice. 

The  registered  mail,  containing  as  it  does  packages  of 
value,  should  be  recorded  in  a  book  prepared  for  that  pur- 
pose, and  when  the  postoffice  receipt  for  the  same  is  returned 
it  should  be  noted  in  this  register  and  the  receipt  filed  by 
number. 

RECORD  OF  STAMPS  USED 

The  proper  care  and  handling  of  the  postage  stamps  in 
a  large  bank  is  an  important  feature.  The  stamps  are  pur- 
chased in  large  quantities,  and  are  generally  taken  care  of 
by  an  officer  of  the  bank.  When  the  purchases  are  made  a 
charge  ticket  is  sent  to  the  general  ledger  charging  postage 
stamp  account  with  the  amount  of  money  so  expended. 
Each  day  the  head  mailing  clerk  makes  out  a  requisition  for 
the  stamps  he  will  probably  need,  and  this  is  given  to  the 
officer  in  charge  of  the  stamps. 

When  the  letters  have  all  been  stamped  and  counted  a 
statement  blank  is  filled  out  showing  the  number  of  letters 
and  their  respective  value  in  stamps.  Such  a  statement 
sheet  is  here  shown: 


'f 


DAILY   STATEMENT   OF    POSTAGE    USED 


628 


THE    PRACTICAL   WORK   OF   A   BANK 


A  statement  is  sent  to  the  officer  having  charge  of  the 
stamps  at  the  close  of  each  day. 

The  amount  shown  by  the  "cash  balance"  of  this  state- 
ment must  agree  with  the  value  of  stamps  and  unused 
stamped  envelopes  on  hand  with  the  head  mail  clerk. 

The  amount  as  shown  by  this  statement  as  "stamps  used 
$118.12"  should  be  reported  to  the  general  ledger  bookkeep- 
er by  charge  and  credit  tickets  to  charge  an  account  styled 
"Mail  Acct."  and  to  credit  the  "Postage  Stamp  Acct." 

r<xa  M-lM-l-o  .     —      _  /    

DAILY  POSTAGE.     W  lafom****. 


OATK 

fat  /»/»  7 

DENOMINATIONS 

SUMMARY 
•tnwtal  Ca«h  V«lv.« 

!<• 

»«. 

«c. 

»«. 

0*.       1        »>.  . 

»«. 

/ 

SUmp*  OB  hud.    .     .     . 
Stampa  receded;  .     .     . 
Total  

l*e 

tfftj 

33 

f 

»nr 

//f 

*-9 

On  hand 
Receipt* 
Total 
Diab'nd 

Caih 
Balance 

¥ 

1    0 

£•• 

1*0€> 

t(o« 

— 

— 

— 

— 

/ 

0 

.7 

f-fo 

«Jo*  T 

/6*j 

f 

•*v 

/If 

SV 

/ 

¥ 

9    c 

Total  atampi  «ed     •     • 
Balance  •tamp*  on  band. 
Value  in  denominations. 

*•*• 

\%.f 

A*W 

*- 

¥4- 

z«r 

JL* 

/ 

/ 

f  / 

to 

~rr<f 

77 

6 

/^ 

fi 

3e 

J 

°f 

f  .*• 

»/^? 

*  Ztt 

t    -3» 

f    .tt 

f  j.t  +• 

i3.*« 

Tim.  maile 
Nmnbn  of  l 


DAILY  STATEMENT  OP   POSTAGE 


"The  Postage  Stamp  Acct."  will  then  show  the  total 
amount  of  stamps  on  hand,  both  in  the  officer's  and  the 
head  mail  clerk's  hands,  and  the  "Mail  Acct."  will  show  the 
actual  expense.  This  can  be  done  at  the  end  of  each  week, 
or  at  the  close  of  the  month  if  preferred,  by  keeping  these 
daily  statements  carefully  filed  and  making  a  total  of  the 
amount  used,  with  the  adding  machine.  The  total  balance 
on  hand  as  shown  by  the  "Postage  Stamp  Acct."  can  be 
verified  at  any  time.2 


After  it  is  no  longer  the  day's  mail  it  becomes  exceed- 
ingly valuable  as  a  record,  and  the  old  adage:  "Never  write 
a  letter  and  never  destroy  one"  is  apropos.  But  banks  both 
write  and  destroy — after  waiting  a  reasonable  time  to  allow 


2\Vith  acknowledgment  to  A.  R.  Barrett  in  The  Bankers  Magazine. 


THE  MORNING    MAIL  529 

for  any  differences  to  be  settled,  particularly  in  collection 
letters. 

The  filing  is  now  usually  done  in  vertical  files,  using 
steel  or  wooden  cases  built  for  that  purpose.  The  enclosures 
are  manilla  folders,  and  the  filing  is  done  by  number,  by 
subject,  or  by  name,  the  latter  lending  itself  to  many  classi- 
fications, such  as  geographical  arrangement,  with  as  many 
sub-divisions  as  the  needs  may  require.  In  some  cases  the 
filing  is  done  by  number,  each  correspondent  being  given  a 
number,  which  number  appears  on  the  manilla  folder  and 
is  indexed  by  card  alphabetically. 

The  classification  may  also  be  by  subjects,  and  the  let- 
ters filed  under  subject  and  there  classified  by  names  or 
numbers;  but  the  more  satisfactory  way  is  to  file  by  names, 
as  the  name  of  the  person  or  the  corporation  is  always 
known. 

If  filed  by  number,  there  must  be  a  card  index  to  locate 
the  number,  making  the  additional  work  of  finding  the  num- 
ber both  before  filing  and  before  reference.  Thus,  the  let- 
ters of  the  First  National  Bank  of  Boston  would  be  under 
file  No.  175,  and  all  letters  from  that  bank  would  there  be 
filed.  In  the  card  index,  all  Massachusetts  correspondents 
would  be  indexed  under  that  State  and  all  Boston  banks 
under  Boston,  and  we  would,  therefore,  look  under  Massa- 
chusetts— Boston — First  National  Bank,  and  find  No.  175. 
Turning  to  file  175  we  would  find  the  letters  arranged  by 
dates.  There  might  also  be  a  separate  file  for  individuals 
and  one  for  banks. 

It  is  the  custom  of  banks  to  keep  letters  for  a  certain 
length  of  time  before  destroying  them.  Thus,  letters  of 
each  day  are  finally  put  in  bags  and  labeled,  and  each  day 
a  bag  is  destroyed.  Banks  must  decide  for  themselves  how 
long  to  keep  correspondence.  Some  keep  letters  six  years, 
others  longer,  and  others  destroy  remittance  letters  after  the 
account  has  been  reconciled.  It  is  a  matter  of  judgment; 
but  merely  remittance  letters  need  not  be  kept  as  long  as 
letters  involving  more  important  subjects,  for  the  account 
once  reconciled,  the  letters  which  contained  the  items  are 
no  longer  of  vital  import.  But  due  allowance  must  be  made 
for  errors  and  time  allowed  for  adjustments  before  corre- 
spondence is  destroyed. 

35 


530  THE   PRACTICAL  WORK  OF   A   BANK 

A  PRACTICAL  FILING  SYSTEM 

Bank  correspondence  in  an  institution  of  average  size 
may  be  divided  as  follows: 

1st — General  Correspondence. 

2nd — Corresponding  Banks. 

3rd — Miscellaneous  Banks. 

4th— Credit  File. 

Apart  from  the  above,  the  savings,  trust  and  safe  de- 
posit departments  of  a  large  bank  will  require  their  own 
files. 

1st — General  Correspondence. 

Illustration  No.  1  shows  the  best  method  for  filing  gen- 


NO.    1 
FOR    GENERAL     CORRESPONDENCE 


eral  correspondence  with  customers  and  others.  This  is 
known  as  the  Direct  Name  System  of  Vertical  Filing.  The 
principle  of  the  system  is  to  keep  together  in  one  folder,  all 
correspondence  with  each  important  correspondent,  and  to 
file  miscellaneous  letters  in  alphabetical  folders. 

Grey  pressboard  guides  with  celluloided  tabs  bear  the 
divisions  of  the  alphabet  as  shown  in  the  illustration.  The 
guide  tabs  are  arranged  in  two  rows  at  the  center,  and  just 
to  the  left  of  the  center  of  the  file  drawers.  In  the  case 
of  a  small  bank  a  simple  set  of  No.  25  guides — one  for  each 
letter  of  the  alphabet — is  sufficient.  For  larger  files  a  larger 
sub-divided  set  may  be  obtained,  sets  being  available  in  any 
desired  size. 


THE  MORNING    MAIL 


681 


For  important  correspondents  there  are  individual  fold- 
ers at  the  right  of  the  file  with  wide  tabs  on  which  are  writ- 
ten the  names.  Miscellaneous  letters  are  filed  in  alphabet- 
ical folders  with  tabs  at  the  left  edge  of  the  drawer.  The 
tabs  of  all  of  the  folders  are  of  the  same  height  as  the  guide 
tabs,  and  reference  to  the  folders  is  thus  facilitated. 

The  guides  in  any  set  are  numbered  consecutively,  com- 
mencing with  No.  1  on  the  first  or  "A"  guide,  and  running 
to  No.  25  on  the  "Z"  guide  in  the  case  of  a  set  of  No.  25 
guides ;  to  No.  40  in  the  case  of  a  set  of  No.  40  guides,  and 
so  on.  The  alphabetical  folders  at  the  left  of  the  file  are 
printed  and  numbered  to  correspond  with  the  guides.  When 
an  individual  folder  with  right-hand  tab  is  made  out,  it  is 
numbered  to  correspond  with  the  guide  behind  which  it  be- 
longs. This  numerical  feature  acts  as  a  check  on  accuracy 
in  refiling  folders.  When  a  folder  has  been  removed  for 
reference  it  is  filed  with  the  greatest  speed  and  accuracy 
through  the  simple  expedient  of  noting  the  number  and 
placing  the  folder  behind  the  guide  of  that  number.  This 
is,  needless  to  say,  much  quicker  and  more  accurate  than  if 
it  were  necessary  to  read  the  individual's  name  and  then 
find  the  alphabetical  guide  behind  which  that  name  belongs. 

2nd — Corresponding  Banks. 

The  volume  of  matter  to  be  filed  in  the  case  of  corre- 
sponding banks  requires  a  separate  and  distinct  division  of 
the  file  for  each  bank.  Illustration  No.  2  shows  how  this 


NO.     2 
FOR    CORRESPONDENCE    WITH    CORRESPONDING    BANKS 


582 


THE    PRACTICAL   WORK   OF   A   BANK 


division  is  accomplished  through  the  use  of  pressboard 
guides  with  metal  label  holders  for  each  bank.  All  corre- 
spondence, remittance  and  collection  letters  are  filed  in 
folders  back  of  the  proper  bank  guide.  Monthly  folders  are 
generally  used  for  this  purpose  as  shown  in  the  illustration, 
although  in  the  case  of  some  of  the  smaller  corresponding 
banks,  it  may  be  sufficient  to  use  an  expanding  folder,  or  to 
use  bi-monthly  or  semi-annual  folders. 

The  method  shown  in  the  illustration  will  answer  in  the 
case  of  small  and  medium-sized  banks.  In  some  of  the 
larger  banks  it  is  necessary  on  account  of  the  bulk  of  the 


TRANSFER    CASE    FOR   FILING   OLD    CORRESPONDENCE 

matter  to  separate  it  into  classes  through  the  use  of  colored 
folders.  Each  folder  may  contain  the  correspondence  for 
a  period  of  one  or  two  months.  These  colored  folders  are 
filed  directly  back  of  the  guide  in  place  of  the  monthly  fold- 
ers. Each  class  of  correspondence  is  distinguished  by  a  dif- 
ferent color,  and  the  tabs  of  the  folders  are  printed  in  some 
such  classification  as  follows:  "Official,"  "Sundry," 
"Acknowledgments,"  "Collections,"  "Cash  Letters  and  Re- 
turns for  Transient  Accounts,"  "Letters  of  Advice." 

The  contents  of  a  file  of  transit  correspondence  is  gen- 
erally transferred  at  from  intervals  of  two  to  six  months, 
depending  upon  the  length  of  time  during  which  reference 
is  desired  to  these  original  documents.  It  is  transferred  to 
vertical  drawer  style  .transfer  cases,  where  the  folders  are 
kept  in  the  same  order  as  in  the  active  file. 

In  the  case  of  small  banks  where  reference  to  transit 


THE  MORNING    MAIL  688 

items  is  infrequent,  the  plan  is  sometimes  followed  of  filing 
all  this  correspondence  by  date,  using  month  and  day  guides. 
The  vouchers  for  each  day  are  arranged  in  alphabetical 
order. 

The  Shannon  file  is  also  used  for  this  purpose,  the  illus- 
tration showing  the  Shannon  file  drawer  with  double  arch. 
All  papers  are  perforated  and  filed  over  the  arch  in  order 
of  date,  and  a  single  drawer  will  hold  a  month's  correspond- 


THE    SHANNOK    FILE 


ence  in  the  case  of  a  small  bank.  The  entire  contents  of  the 
drawer  is  removed  and  put  in  a  Shannon  transfer  case,  as 
shown  in  illustration,  where  it  may  be  secured  at  any  time 
by  reference,  first  to  the  date,  and  second  to  the  name. 

3rd — Miscellaneous  Banks. 

On  account  of  the  similarity  of  bank  names,  it  is  best 
to  file  this  class  of  correspondence  by  towns.  Illustration 
page  534  shows  a  very  convenient  method.  Alphabetical  cel- 
luloided  guides  are  used  just  as  shown  in  illustration, 
but  they  are  for  dividing  town  names  instead  of  individual 
names.  Each  bank  is  given  a  folder  with  a  right-hand  tab 
on  which  is  written,  first,  the  name  of  the  town,  and  be- 
low it  the  name  of  the  bank.  Each  folder  is  numbered  to 
correspond  with  its  guide  which  effectually  prevents  mis- 
filing.  Note  folders  for  First  National  Bank  of  Alton  and 
Cairo  National  Bank,  in  the  illustration.  If  a  letter  is  re- 
ceived for  some  other  bank  in  Alton,  it  is  filed  in  the  "A" 
folder  at  the  left  of  the  drawer,  which  is  reserved  for  mis- 
cellaneous purposes. 


534 


THE    PRACTICAL   WORK   OF   A   BANK 


In  the  case  of  a  large  city  like  Chicago,  where  corre- 
spondence is  carried  on  with  several  banks,  it  is  advisable 
to  insert  a  guide  with  metal  label  holder  printed  "Chicago," 
in  the  proper  position  back  of  the  "C"  guide.  Each  Chi- 
cago bank  is  then  given  a  metal  label  holder  guide  which 
is  placed  back  of  the  Chicago  guide,  as  in  the  case  of  the 
Continental  and  Commercial  National  Bank  and  Corn  Ex- 
change National  Bank,  in  the  illustration.  If  necessary, 
monthly  folders  are  used  for  these  large  banks. 

This  method  of  indexing  correspondence  with  banks 
other  than  corresponding  banks  is  extremely  elastic,  and 
Inay  be  used  by  the  very  small  or  the  very  large  bank.  A 


FOR    CORRESPONDENCE     WITH    OTHER    BANKS 


small  bank  will  use  a  set  of  No.  25  alphabetical  guides  for 
dividing  the  towns,  and  a  large  bank  may  use  a  set  of  guides 
several  times  that  size.  Folders  for  individual  banks  are 
made  out  as  required,  and  special  guides  for  large  cities  and 
large  banks  are  inserted  wherever  necessary,  to  permit  of 
the  use  of  the  monthly  folders. 

tth— Credit  File. 

In  the  large  banks  the  credit  file  assumes  large  propor- 
tions. The  vertical  file  is,  of  course,  used,  and  the  princi- 
ple is  followed  of  keeping  each  individual's  papers  in  a  sep- 
arate folder.  Many  credit  files  employ  the  numerical 
method,  each  name  being  designated  by  number,  and  fold- 
ers arranged  in  that  order.  This  requires  the  use  of  a  card 


THE  MORNING    MAIL  585 

index  arranged  alphabetically  with  all  desired  cross  refer- 
ences. 

The  Direct  Name  System  which  is  shown  in  illustration 
1  may  also  be  used  to  good  advantage  as  a  credit  file,  pro- 


CHEDIT    FILES 


viding  as  it  does  a  separate  folder  for  each  customer  in  which 
are  filed  all  original  papers  regarding  that  customer's  credit. 
There  is  a  decided  tendency  toward  the  use  of  steel  cabi- 
nets for  filing  bank  records.  This  originates  in  a  desire  to 
protect  records  against  fire,  but  it  is  nevertheless  true  that  a 
single  wall  steel  cabinet  offers  much  less  resistance  to  fire 


FOLDERS   IX    DRAWER 


than  a  well-made  oak  cabinet.  If  protection  is  to  be  assured 
a  cabinet  with  double  walls  throughout,  lined  with  asbestos, 
should  be  obtained.  The  illustration  shows  such  a  steel  cabi- 
net of  the  four-drawer  upright  style  used  for  bank  corre- 


586 


THE    PRACTICAL  WORK  OF   A   BANK 


spondence.  All  outer  surfaces  of  this  cabinet  are  composed 
of  double  steel  walls  completely  insulated  by  cellular  asbes- 
tos. Every  drawer  is  equipped  with  a  safety  latch  which 
automatically  fastens  the  drawer  when  it  is  closed,  and  ef- 
fectually prevents  destruction  of  the  papers  from  a  small 


MANILLA    FOLDER    FOR    FILING    CREDIT   INFORMATION 

blaze  which  would  otherwise  consume  the  contents  of  an 
open  drawer.  These  steel  cabinets  are  a  radical  departure 
from  any  cabinet  previously  placed  on  the  market  since  all 
other  cabinets  lack  the  double  walls  and  asbestos  used 
throughout  as  well  as  the  drawer  catch  feature.3 


•The  above  was  prepared  by  the  Yawman  and  Erbe  Company  of  Rochester, 
N.  Y.,  by  request  of  the  author  for  what  they  considered  a  proper  filing  method 
for  the  mail  of  the  average  bank,  and  acknowledgement  is  here  made  for  their 
valuable  contribution. — W.  H.  K.,  Jr. 


CHAPTER  XVI. 

COST    ACCOUNTING  AND   ANALYSIS    OF 
ACCOUNTS 

The  tendency  of  all  business  is  to  a  more  accurate  and 
scientific  basis  of  operation.  It  no  longer  suffices  to  know 
the  approximate  cost  of  producing  an  article,  and  the  cost 
of  selling  it,  competition  having  compelled  manufacturers  to 
know  to  an  exactness  what  the  cost  of  production  has  been, 
including  a  proportionate  charge  for  all  overhead  expenses 
incidental  to  marketing  the  product.  Loose  methods  have 
resulted  not  only  in  loss  of  business  but  in  bankruptcy. 

To  figure  that  cost  of  raw  material  plus  wages  equals 
the  cost  of  production  is  deceptive;  for  in  the  cost  of  pro- 
duction must  be  included  depreciation  and  wear  and  tear  on 
plant,  rent,  administration  charges,  duty,  freights,  etc.,  so 
that  each  article  shall,  in  its  selling  price,  include  some  por- 
tion, however  small,  of  the  general  overhead  expenses,  as 
well  as  return  its  first  cost  and  a  profit. 

Banking  of  late  years  has  followed  the  same  lines.  Bank- 
ers are  no  longer  satisfied  to  know  that  they  have  made  a 
profit — they  want  to  know  where  the  profit  came  from  and 
how  it  arose.  It  is  needful  that  the  sources  of  profit  be 
known  in  order  that  the  sources  of  loss  be  also  known. 
While  losses  must  attend  all  business,  the  source  and  the 
reason  for  the  loss  must  be  located,  else  the  little  leaks  may 
spring  into  big  ones. 

Banks  are  more  and  more  giving  attention  to  the  exact 
cost  of  doing  business.  They  rightly  want  to  know  who  are 
profitable  customers  and  who  are  not.  It  may  be  that  a  de- 
positor carries  a  good  balance,  and  on  its  face  would  seem 
to  be  decidedly  desirable,  but  when  it  comes  to  determining 
what  the  account  costs  the  bank,  and  what  it  earns,  it  may 
show  a  loss. 

BANK  PROFITS 

The  general  sources  of  a  bank's  profits  are:  (a)  The 
loan  of  its  capital;  (b)  the  loan  of  its  deposits;  (c)  ex- 

537 


538 


THE    PRACTICAL  WORK  OF   A   BANK 


change  on  collections;  (d)  investments;  (e)  profit  on  circu- 
lation. 

The  funds  from  which  it  derives  these  loan  profits  come 
mainly  from  its  capital  and  its  deposits.  The  profits  from 
bank  note  issues  under  the  National  Banking  Act  are  not 
large,  due  to  the  low  income  from  bonds,  their  high  cost  and 
the  expenses  attending  note  issue. 

The  profit  from  making  acceptances  is  yet  a  new  venture 
in  our  banking  scheme,  while  exchange  profits  will,  under 
the  Federal  Reserve  Banks,  be  greatly  reduced.  The  loan 
of  its  deposit  funds  is,  therefore,  the  main  source  of  profit, 
and  before  it  can  loan  money  it  must  first  obtain  it. 


IUAMe                                                                                                                                                                                                                                   DATF   OP^MP-n, 

1913 

1914 

1915 

1916 

1917 

1918 

"oVSlPOsiT* 

AVCTAOM 

*T°«M3 

•* 

AMOUNT 

JANUAI.V 

CO, 

00. 

00 

00. 

00. 

00 

00 

PBBAUARV 

00. 

00. 

00 

00. 

00. 

00 

on 

MA.CH 

00. 

00. 

00 

00. 

00. 

OU 

OQ 

AMK 

00. 

00. 

00 

00. 

00. 

00 

00 

MAT 

00 

00. 

aot 

00. 

'10. 

00 

00 

JUNC 

00 

00. 

00 

00. 

00. 

00 

00. 

MU 

00 

00. 

00 

00. 

00. 

00 

00. 

AU9UST 

00 

00. 

00 

00. 

00. 

00 

00. 

IWHMH 

00 

00. 

00 

00. 

<Xi 

00 

00. 

OCTOOCN 

00 

00. 

00 

00. 

00. 

00 

00. 

NOVUUU. 

00 

00. 

00 

00. 

00. 

00 

00 

nprrMHPH 

IIP 

nn 

nn 

00. 

on 

00 

m 

VtrlT  Avcraf  « 

-JtUi 

,.  Ba. 

-SOL. 

_ttlk 

-ca 

00. 

SSL. 

CARD  RECORD  OF  AVERAGE  BALANCES 


It  is  obvious  that  if  a  man  deposit  with  a  bank  a  certain 
sum  of  money  which  the  bank  may  use  as  its  own,  repay  him 
as  he  orders,  but  in  the  meantime  loan  part  of  it  out,  the 
bank  derives  a  distinct  advantage.  It  is  not  all  net  profit, 
because  there  is  the  cost  of  keeping  the  loaning  machinery 
in  operation  and  the  cost  of  the  money  itself.  The  differ- 
ence between  what  it  costs  to  carry  the  account  and  to  ad- 
minister it,  and  what  is  received  from  loaning  the  funds  is 
the  bank's  profit. 

But  if  the  deposit  is  not  money,  but  a  form  of  credit 
which  must  be  converted  into  money  and  cannot  be  loaned 
until  so  converted,  it  is  plain  that  the  bank  does  not  get  the 
profit  attending  a  cash  deposit.  And  if  incidental  expenses 
creep  in  that  were  not  contemplated  in  the  cost  of  obtaining 


ANALYSIS   OF   ACCOUNTS  589 

and  administering  the  account,  the  profit  will  be  reduced  ac- 
cordingly. 

In  such  cases  careful  analysis  of  the  account  must  be 
made  to  determine  its  profitableness,  or  what  would,  on  the 
face,  seem  to  be  a  profitable  account  may  be  a  losing  one. 
Many  banks  have  concluded  that  the  better  plan  is  to  charge 
for  the  collection  and  pay  interest  if  the  balance  warrants; 
while  others  make  no  charge  for  the  service  and  pay  no  in- 
terest. It  is  a  matter  of  opinion. 

PROFITABLE   AND    UNPROFITABLE   ACCOUNTS 

The  function  of  the  analysis  department  is  to  determine 
the  profitableness  of  the  accounts.  This  process  is  described 
subsequently.  But  as  a  proposition  in  finance  and  banking, 
every  account  must  show  a  profit  to  the  bank  in  some  form* 
however  remote,  or  it  is  not  a  desirable  account.  There  are, 
in  all  places,  men  who  carry  bank  accounts  simply  for  busi- 
ness convenience.  They  never  stop  to  consider  the  right  of 
the  bank  to  a  profit  on  the  account.  They  draw  against  un- 
collected  funds,  deposit  only  enough  to  meet  their  checks  as 
they  calculate  they  will  be  presented,  and  are  more  or  less 
short  of  funds  all  the  time.  These,  like  the  proverbial  poor, 
will  ever  be  with  us.  What  to  do  with  them  is  the  problem. 
Some  banks  have  decided  to  make  a  charge  if  the  average 
balance  is  below  what  has  been  decided  to  be  profitable; 
while  others  suffer  the  evil  with  the  best  grace  possible,  and 
all  would  welcome  the  day  when  every  depositor  recognizes 
the  right  of  the  bank  to  a  profit  on  his  account  and  acts  ac- 
cordingly. 

An  interesting  calculation  was  made  by  a  clerk  in  a  large 
city  bank.  On  one  account  in  this  bank  there  were  depos- 
ited a  large  number  of  "collection"  notes  at  stated  intervals. 
So  far  as  ordinary  analytical  processes  showed,  the  balance 
carried,  $25,000,  was  sufficient  to  cover  all  expenses  in  the 
nature  of  exchange  and  time  cost,  the  usual  test  to  which  an 
account  is  put.  There  was,  however,  another  element  in  this 
case  which  was  carefully  estimated.  If  the  bank  had  re- 
ceived from  all  its  $50,000,000  line  of  deposits  an  equal 
number  of  items  for  every  $25,000,  there  would  have  been 
required  at  least  7,500  clerks  to  handle  only  this  particular 
end  of  the  business! 


540  THE   PRACTICAL   WORK  OF   A   BANK 

THE  BANK'S  SERVICK  TO  THE  DEPOSITOR 

The  bank  performs  a  service  to  the  depositor  that  no 
other  institution  does.  Aside  from  its  function  of  note 
issue,  deposit  and  discount,  it  occupies  a  very  useful  place  in 
the  business  scheme.  Let  us  see  what  the  bank  does  for  the 
depositor  aside  from  lending  him  money.  It  receives  his 
funds — money,  checks  and  other  instruments  of  credit  on  de- 
posit and  for  collection.  The  money  it  keeps  safely;  the 
other  items  it  turns  into  money  sometimes  without  cost.  It 
furnishes  him  with  a  check-book  and  pass-book  free;  pays 
his  checks  as  he  directs;  returns  the  receipted  vouchers  with 
a  statement  rendered;  often  makes  up  his  payroll;  furnishes 
money  in  such  form  as  is  requested;  guarantees  that  the 
party  to  whom  the  check  is  payable  has  received  the  money ; 
and  warrants  not  to  pay  on  forged  orders.  The  value  of 
this  service  is  frequently  forgotten  or  unappreciated. 

With  this  checking  privilege  and  all  it  means  in  mind,  it 
is  not  unreasonable  to  ask  the  depositor  to  keep  a  balance 
commensurate  with  the  service  rendered.  The  bank  is  un- 
der expense  in  doing  all  this,  and  it  is  most  assuredly  worth 
something  to  the  depositor  to  have  it  done.  But  in  the  com- 
petition for  business,  and  the  tendency  of  customers  to  ask 
interest  on  their  balances,  banks  have  been  paying  interest 
on  balances  that  are  too  small  to  earn  the  interest  credited 
and  show  a  profit  to  the  bank,  when  the  acid  test  of  cost 
accounting  is  applied.  The  result  has  been,  in  not  a  few 
cases,  that  the  bank  has  built  up  a  deposit  line  and  lost  in 
net  income,  so  that  liquidation  became  necessary  in  order  to 
save  the  institution  from  becoming  insolvent.  Many  large 
banks  whose  names  are  now  in  banking  history,  have  suf- 
fered from  the  evils  of  paying  too  much  for  business. 

THE  QUALITY  OF  THE  ACCOUNT — ITS  INFLUENCE 

It  is  of  importance  in  all  banks,  but  particularly  in  large 
ones  where  the  depositors  are  not  all  known  personally,  to 
determine  what  kind  of  an  account  the  customer  carries,  and 
also  the  influence  of  the  depositor  on  other  depositors.  The 
individual  balance  is  important,  but  other  balances  that  exist 
because  of  the  depositor's  friendship  for  the  bank  are  equal- 


ANALYSIS    OF   ACCOUNTS 


541 


ly  so.    He  may  have  introduced  friends.     His  family  con- 
nections may  be  important. 

This  cannot  satisfactorily  be  determined  by  depending 
upon  the  bookkeeper's  memory,  or  the  memory  of  officials, 
and  it  becomes  needful  that  a  record  of  the  accounts  be  kept 
from  this  standpoint.  To  properly  record  these  facts,  cards 
are  kept  containing  full  details  as  to  the  history  of  the  ac- 


ANALYSIS  OF  ACCOUNT  FOR 


191 


Average  balance 

AMOUNT    RECEIVED 

Out  of  town                    $  
New  York  Exchange       $ 

1 

Interest  @  % 
Exchange  received 
LESS 
merest  Paid 
Exchange  Paid 
Profit 

on  loanable  money 

S 

t 

$ 

Total 

Outstanding  
Available  balance 
Less  reserve 
Loanable  money 

t 

.days 

1 

? 

*      -  



S  

*   

ANALYSIS    SHEET    FOR    ANALYZING    ACCOUNTS 

count;  the  average  balance;  date  opened;  by  whom  intro- 
duced; kind  of  business;  whether  a  box  renter,  borrower, 
etc.,  and  if  new  business  has  been  introduced  through  that 
connection. 

It  is  not  a  difficult  matter  to  estimate  the  average  bal- 
ance each  week.  If  the  balance  for  each  of  four  days  is 
placed  in  a  separate  column,  once  a  week,  the  average  can 
be  arrived  at  by  a  mental  calculation.  This  is  not,  of  course, 
exact,  but  if  made  for  a  period  of  time,  is  fairly  indicative 
of  the  status  of  the  account. 


542  THE    PRACTICAL   WORK   OF   A   BANK 

Every  account  on  a  bank's  ledger  has  some  bearing  upon 
the  profit  or  loss  account  of  the  bank.  The  banker  aims  to 
serve  the  public,  but  should  not  do  so  at  the  expense  of  his 
stockholders,  to  whom  is  due  a  profit  from  the  use  of  their 
capital.  The  bank  justifies  its  existence  through  its  many 
collateral  services  rendered  to  both  customers  and  those  who 
are  not.  The  banker  is  not  a  philanthropist,  but  a  business 
man,  realizing  that  service  brings  its  own  reward,  and  he 
who  serves  best  obtains  the  largest  reward.  The  banker  can- 
not charge  for  every  service  rendered;  to  do  so  would  be  to 
invite  competition  and  lose  much  profitable  business;  but  he 
should  be  compensated  for  the  valuable  and  steady  services 
which  attend  the  keeping  of  an  account  with  a  customer. 

But  if  it  were  not  for  the  accounts  on  its  books,  the  bank 
could  not  exist,  and  the  handling1  of  accounts  is  the  reason 
for  the  bank's  machinery;  the  capital  and  surplus  being  in 
the  nature  of  a  guaranty  fund  which  the  stockholders  have 
contributed  to  safeguard  the  accounts.  On  the  surface  the 
large  accounts  would  naturally  seem  to  be  the  paying  ones; 
but  when  it  is  considered  that  upwards  of  50,000  and  even 
100,000  items  have  been  known  to  go  through  a  single  ac- 
count in  a  month,  the  cost  of  clerical  labor  will  manifestly  be 
greater  than  on  an  inactive  balance,  and  due  consideration 
given  in  the  cost  accounting  scheme  to  the  labor  cost. 

The  small  account  is  the  problem.  They  are  numerous, 
and  the  balances  often  small — so  small  as  to  be  almost  a 
negligible  quantity.  And  the  problem  is  whether  to  refuse 
them,  and  thus  drive  away  future  business,  or  make  a  charge 
for  carrying  them,  or  accept  them  as  they  come.  A  small 
balance  carefully  nursed  along  may  prove  in  the  end  a  most 
desirable  one.  The  owner  may  have  a  struggle,  and  the  ac- 
count may  show  the  evidence  thereof,  but  once  he  gets  es- 
tablished he  may  prove  a  very  desirable  customer,  and  the 
poor  depositor  often  becomes  a  very  good  borrower;  and  a 
good  borrower  is  often  excused  for  keeping  a  small  balance, 
for  good  borrowers  are  the  life  blood  of  banking,  and  good 
borrowers  are  as  necessary  as  good  depositors. 

PENALIZING  SMALL  BALANCES 

There  are  banks  and  trust  companies  in  every  large  city 
that  have  adopted  the  rule  that  if  a  depositor  does  not  keep 


ANALYSIS   OF   ACCOUNTS  643 

an  average  balance  of  a  certain  amount  (in  some  cases  $200) , 
a  small  fee  is  charged,  which  penalizes  drawing  the  balance 
below  that  amount.  The  reason  is  that  the  bank  has  de- 
cided, either  upon  careful  investigation,  or  upon  mere  esti- 
mate, that  a  balance  of  less  than  a  certain  amount  is  not  a 
profitable  one;  although  in  certain  cases  the  rule  has  been 
made  discretionary,  as  it  necessarily  must  be ;  for  many  small 
accounts  are  in  the  nature  of  accommodation  to  those  who 
are  connected  with  firms  and  corporations  carrying  large 
balances,  and  the  small  account  is  a  courtesy  to  one  of  the 
officials.  If  the  reason  for  the  charge  is  explained  to  the 
customer,  he  will  quickly  see  the  justice  of  the  bank  earning 
a  profit  on  every  account,  however  small  that  profit  may  be. 


COST  ACCOUNTING  IN  BANKING 

Tersely  stated,  the  proposition  in  cost  accounting  in 
banking  is  to  apportion  the  expense  incidental  to  an  account 
to  that  account,  and  to  credit  to  the  account  its  proportion 
of  earnings,  which  may  be  more  accurately  ascertained  than 
the  costs.  One  of  the  aims  of  cost  accounting  is  to  arriye  at 
the  usable  balance.  For  example,  a  bank  might  have  an 
account  with  $10,000  average  balance,  and  one-half  the 
amount  might  be  in  process  of  collection,  and,  therefore,  the 
bank  has  but  $5,000  as  a  usable  balance.  From  the  $5,000 
the  reserve  must  be  deducted  and  the  balance  must  carry 
the  burden  of  earning  the  interest  paid  on  the  whole  ac- 
count. If  the  loanable  balance  earns  less  than  the  whole  ac- 
count costs,  it  is  a  losing  proposition.  The  actual  usable 
balance  is,  therefore,  the  basis  upon  which  all  bank  earnings 
are  founded. 

The  first  essential  is  to  ascertain  the  loanable  balance  by 
finding  the  average  balance,  from  which  must  be  deducted 
the  amount  credited,  but  in  process  of  collection,  and  the  re- 
serve. It  is  obvious  that  a  bank  cannot  loan  what  it  does  not 
possess,  and  funds  in  the  mails  are  not  funds  in  hand,  and 
assuredly  the  bank  cannot  loan  its  reserve.  Therefore,  from 
the  average  balance,  or  actual  balance,  these  items  must  be 
deducted.  The  earning  power  of  money  must  then  be  ascer- 
tained for  the  period,  and  the  account  credited  with  its  prop- 
er proportion. 


544  THE    PRACTICAL  WORK  OF   A  BANK 

ADMINISTRATIVE  COSTS 

The  greatest  problem  in  cost  accounting  for  banks  as 
well  as  commercial  houses,  is  the  administration  costs.  It  is 
comparatively  easy  to  determine  how  much  clerk  hire,  sta- 
tionery, postage,  rent,  light  and  heat  should  be  apportioned 
to  each  department  of  the  work,  but  when  it  comes  to  pro- 
rating the  administration  costs,  it  is  difficult  to  adequately 
determine  how  much  of  the  supervising  expense  belongs  in 
a  single  department.  It  might  be  done  by  determining  what 
proportion  of  the  gross  profit  each  department  contributes, 
and  charging  thereto  for  administration  a  proper  proportion 
of  salaries,  etc.,  but  to  carry  the  charge  down  to  individual 
units  is  often  difficult. 

Cost  accounting  being  an  inexact  science,  many  of  the 
fixed  charges  must  necessarily  be  estimated.  For  instance, 
we  have  five  adding  machines  in  the  transit  department. 
They  cost  $500  each.  Their  life  may  be  six  years  or  ten;  but 
the  cost  should  be  distributed  as  nearly  as  possible  over  the 
life  of  the  machine,  and  its  cost  made  part  of  each  year's 
operations;  but  at  best  this  would  be  an  estimate. 

EXCHANGE  CHARGES — INTEREST 

In  order  to  know  the  cost  of  an  account  as  respects  ex- 
change charges  and  loss  of  interest,  the  items  that  are  col- 
lected must  be  analyzed,  their  cost  known,  and  the  time  con- 
sumed in  making  the  collection  figured,  so  that  the  interest 
loss  will  be  possible  of  computation.  Thus,  an  item  sent  to 
San  Francisco  will  consume  about  five  days  going,  the  same 
returning  and  probably  one  day's  delay  in  the  bank.  Twelve 
days'  interest  is,  therefore,  lost  before  the  funds  can  be 
loaned,  and  this  is  a  factor  of  no  small  import. 

The  National  Bank  Act  has  so  framed  the  banking  laws 
of  the  country  that  the  reserve  cities  become  almost  involun- 
tarily the  clearing  centers  as  well.  But  while  this  is  logical 
and  the  most  convenient  method  of  transferring  credit  in  the 
shape  of  checks,  yet  the  bank  act  has  left  us  absolutely  with- 
out a  common  medium  of  exchange.  We  are  forced,  there- 
fore, to  use  actual  money,  which  is  expensive  to  ship;  or 
New  York  funds  which,  in  view  of  the  clearing-house  rules 
of  that  city,  are  expensive  to  create.  There  is,  therefore,  a 


ANALYSIS   OF   ACCOUNTS  546 

considerable  item  of  expense  placed  upon  the  banks  in  the 
handling  of  the  commerce  of  the  nation,  the  only  offset  to 
which,  except  an  actual  charge,  is  the  compensating  balance 
of  the  depositor.  This  expense  is  represented  chiefly  in  what 
is  known  as  "exchange  charges"  which  is  perhaps  the  sub- 
ject of  the  greatest  importance  in  cost  accounting.  That 
there  are  all  sorts  of  abuses  and  evil  practices  abroad  in  the 
land  is  a  matter  with  which  most  bankers  are  familiar.  These 
conditions  are  of  especial  import  to  the  analysis  department 
whose  duty  it  is  to  see  that  the  bank  is  not  imposed  upon 
either  by  its  customers  on  the  one  hand,  or  by  collecting 
banks  on  the  other.1 

THE  EARNING  POWER  OF  MONEY 

To  estimate  that  money  earns  an  average  of  five  per  cent, 
is  mere  guess  work;  and  to  conclude  that  a  certain  rate  has 
been  earned  on  a  certain  balance  is  to  segregate  each  loan 
and  apply  it  to  some  particular  deposit — an  impossible  task. 
The  correct  way  is  to  ascertain  the  actual  earning  power  of 
the  bank  for  a  period,  by  dividing  the  interest  received  from 
loans  and  investments  by  the  average  amount  outstanding, 
thus  getting  an  average  rate.  This  being  ascertained,  the 
account  may  be  credited  with  its  earning  power,  and  the 
result  known  to  a  considerable  degree  of  accuracy.  Each 
account  is  then  treated  as  if  it  were  the  only  account  on  the 
books. 

SPECIAL  COSTS 

There  are  some  accounts  that  have  special  costs  attend- 
ing their  work,  which  should  be  a  charge  to  them  individual- 
ly and  not  to  all.  For  instance,  one  large  bank  handles  the 
accounts  of  a  railroad.  It  sends  messengers  each  day  to  col- 
lect the  funds  turned  in  by  the  conductors  and  agents,  in  en- 
velopes sealed,  as  representing  their  trip  returns  and  cash 
receipts.  It  counts  the  money  and  proves  the  listing.  The 
checks,  if  any,  are  collected,  payrolls  made  up,  dividend 
checks  prepared,  and,  in  fact,  the  bulk  of  the  cash  receipts 
and  many  of  the  disbursements  of  the  railroad  are  made 
not  through,  but  by,  the  bank.  The  cost  attending  this  ac- 

iQuoted,  author  not  known. 

36 


- 

1 

1  • 

t 

i 

i 

1 

OS 

1 

> 

: 

3  1 

II 

u  -• 

* 

JJ 

1 

i 

8 

- 

ii 

£ 

! 

" 

£ 

•- 

< 

j 

' 

' 

1 

^ 

i 

1 

f 

5    I 

| 

5   * 

, 

F 

,     ^ 

1 

I       \ 

-- 

1 

•    S    - 

—   si 

|-  1   ! 

" 

?  «  ! 

; 

J    |    s 
1    1    3 

" 

"7 

^ 

: 

|| 

s 

5     1     8 

1  5  1 

y 

a   I  f 

1  s  : 

546 


ANALYSIS   OF   ACCOUNTS  51? 

count  is  much  greater  than  on  the  accounts  as  a  whole,  and 
its  greater  cost  should  not  be  placed  on  the  ordinary  ac- 
counts, which  have  no  such  special  favors.  In  return  the 
company  carries  a  large  and  profitable  balance. 

For  every  bank  to  go  into  the  matter  of  cost  accounting 
extensively  and  scientifically,  would  not  be  warranted; 
neither  would  the  other  extreme  of  too  much  laxness  be 
wise.  A  scheme  too  elaborate  might  cost  more  than  it  would 
save;  therefore,  a  middle  ground  might  be  chosen  that  will 
give  the  results  desired  without  the  burdensome  expense  at- 
tending. 

Cost  accounting  simply  aims  to  furnish  information,  but 
does  not  attempt  to  dictate  the  policy  of  the  bank  toward  a 
customer.  That  an  account  shows  a  loss,  is  not  to  say  it 
should  be  closed.  The  analysis  is  a  straw  to  show  which  way 
the  wind  blows  and  the  officials  must  decide  what  policy  to 
pursue. 

A  wide  divergence  of  opinion  exists  in  these  matters  and 
is  easily  accounted  for,  as  men  differ  as  to  what  is  or  is  not 
a  proper  charge  against  an  account,  and  the  methods  by 
which  this  charge  is  to  be  ascertained.  Given  the  same  prob- 
lem and  the  same  state  of  facts  surrounding  it,  no  two  would 
agree  in  the  result.  Mr.  E.  H.  Ensell  of  the  National  City 
Bank,  New  York,  has  made  a  close  study  of  this  question, 
and  shows  the  possibilities  of  error  in  these  calculations  to 
be  great.  Writing  at  different  times  and  in  different  places, 
Mr.  Ensell  says : 

THREE  THEORIES  or  APPORTIONMENT 

"There  are  three  distinct  and  separate  theories  in  exist- 
ence with  regard  to  the  apportionment  of  the  earnings  and 
expenses  among  the  accounts.  The  first  theory  is  that  all 
the  service  of  the  different  departments  of  a  large  commer- 
cial bank  should  be  held  at  the  indiscriminate  disposal  of  all 
the  customers;  there  should  be  no  distinction  made  between 
a  maximum  use  or  a  minimum  use  of  the  benefits  of  the  vari- 
ous departments;  no  discrimination  between  an  account  that 
requires  much  labor  or  little  labor  in  its  handling.  This 
theory  works  well  where  there  is  no  wide  margin  of  differ- 
ence between  the  most  active  and  the  most  inactive  account. 

"The  second  theory  is  that  all  the  service  of  the  different 


548  THE    PRACTICAL   WORK   OF    A   BANK 

departments  represents  some  definite  cost  that  may  be  traced 
to  the  accounts  that  take  advantage  of  this  service  and 
should  be  compensated  for  either  directly  or  indirectly  in 
each  case.  This  theory  represents  the  ideal  condition,  but 
could  never  exist  on  account  of  the  indirect  influences  con- 
tinually at  work,  and  which  do  not  always  appear  on  the 
surface. 

"The  third  theory  is  a  combination  of,  or  a  compromise 
between  the  other  two  theories;  that  is,  some  of  the  depart- 
ments exist  as  a  general  accommodation,  the  value  of  which 
may  not  be  determined  in  dollars  and  cents,  but  that  the 
service  of  other  departments  represents  a  definite  expense 
that  may  be  found  to  exist  for  the  benefit  of  one  certain 
class  of  depositors  over  another  class.  It  is  on  the  basis  of 
this  third  theory,  the  reasonable  middle  course,  we  have  the 
two  natural  units  of  cost  in  the  banking  business.  First,  the 
unit  of  cost  on  the  basis  of  dollars  of  balance  to  be  adminis- 
tered ;  second,  the  unit  of  cost  on  the  basis  of  labor,  or  items 
to  be  handled. 

"In  order  to  arrive  at  these  two  units  of  cost  it  is  neces- 
sary to  separate  the  cost  of  the  two  different  classes  of  ser- 
vice. The  administration  expenses  must  be  separated  from 
the  labor  expenses.  In  considering  the  labor  expenses  only 
the  departments  whose  time  is  continually  occupied  in  hand- 
ling items  should  be  included,  such  as,  the  receiving  teller, 
the  mail  teller,  the  check  desk  and  bookkeepers,  the  transit 
and  city  collection  department,  in  short,  all  the  labor  depart- 
ments. All  other  departments,  such  as  the  loan  department, 
the  credit  department,  the  discount  department,  etc.,  are  oc- 
cupied in  the  earning  operation.  They  handle  a  minimum 
number  of  the  items  and  the  cost  of  these  departments  is  to 
be  applied  to  the  accounts  on  the  basis  of  dollars  of  balance 
to  be  administered. 

"The  accounts  then  are  the  raw  materials  with  which  a 
bank  does  business.  It  is  no  longer  a  question  of  how  much 
the  accounts  cost  or  earn — since  all  the  cost  and  earning  has 
to  be  passed  back  to  the  accounts — but  how  to  apportion  the 
cost  and  earning  on  an  equitable  basis. 

"There  are  two  fundamental  mechanical  operations  in 
the  banking  business.  First,  the  earning,  and  second,  the 
labor  operation.  The  earning  operation  is  principally  the 
lending  of  money.  It  is  on  this  operation  we  have  the  unit 


ANALYSIS   OF   ACCOUNTS  549 

of  cost  on  the  basis  of  the  dollars  of  balance  to  be  loaned  or 
administered.  The  second  unit  of  cost  in  the  labor  operation 
is  best  reduced  to  the  handling  of  items,  and  we  have  the 
unit  of  cost  of  each  item  handled  in  each  different  depart- 
ment. 

UNITS  OF  COST 

"The  question  now  arises  how  to  figure  out  the  units  of 
cost  on  these  two  different  operations.  There  are  a  number 
of  methods,  some  very  complex  and  complicated,  others  that 
are  simple  and  direct.  Some  of  the  methods  attempt  to  ap- 
portion the  floor,  desk  room,  overhead  and  fixed  charges, 
and  to  divide  the  clerks'  and  officers'  time,  etc.  This  method 
is  complicated  and  defeats  its  own  purpose. 

"The  most  direct  and  simple  method  that  would  include 
all  the  elements,  both  clerical  labor  and  a  right  proportion 
of  the  fixed  charges,  overhead  expense,  and  administration 
expenses,  of  cost  in  handling  items  in  the  items  department 
would  be  to  charge  into  the  items  department:  First,  those 
expenses  that  are  direct,  such  as  clerk  hire,  bookkeepers, 
books  and  stationery,  etc. ;  second,  to  include  in  this  amount 
already  charged  to  the  different  items  departments  a  fair 
proportion  of  the  other  fixed  charges.  This  amount  may  be 
best  found  by  adding  the  totals  of  the  direct  expenses 
charged  to  the  different  items  departments  and  see  what 
ratio  they  bear  to  the  total  of  all  other  operating  expenses, 
and  by  reducing  the  general  operating  expenses  an  amount 
in  proportionate  ratio  which  the  direct  figures  already  in  the 
items  departments  bear  to  the  general  operating  expenses, 
and  distributing  this  amount  deducted  proportionately 
among  the  items  department  we  now  have  a  very  accurate 
proportion  of  fixed  charges,  overhead  expenses  and  adminis- 
tration expenses  in  the  items  departments  to  cover  the  indi- 
rect expenses  in  handling  the  items. 

"The  remainder  of  the  general  operating  expenses  would 
be  applied  to  the  dollars  of  balances  left  on  deposit  to  be  ad- 
ministered. By  dividing  these  general  operating  expenses 
by  the  number  of  dollars  of  deposits  would  give  the  unit 
cost  on  one  dollar  of  deposit  to  cover  the  expense  of  adminis- 
tration. By  dividing  the  total  of  both  direct  and  indirect  ex- 
penses of  the  different  items  departments  by  the  number  of 


tfisf 

!«  sj 

\ 

<0    O-oo 

OCJ3- 

i 

nn»! 

£i*»! 

*\ 

«  »f 

Or 

^ 

iiii=! 

i| 

-    »! 

0^ 

I*3  <*t  •& 
*>  0~  6u 

K!J 

3:^6 

B  -I 

ui  « 

1 

^    "1 

M 

•? 

i      sJ 

888 

.  J 
^  K 

JB 

"c 

=         i-l 

^ 

3  §3 

2S 

% 
0 

0 

1    -! 

a    2 

1     2! 

0    i 

h      £ 

*    !! 

*    J 

0      S 
g      « 

i    si 

H- 

0              3- 

5^    ^ 

SW           c 
\S            \r        ri 

•   ^           ^       oi 

a*        S     « 

1        5| 

z 

3 

o 

•=>       It," 

*       >a 

^~  N       C 

c                  p      ., 
B.       << 

§       § 

1 

<     2! 

O 

o 
< 

, 

§  2 

4      e  * 

=^ 

J    =! 

It. 

o 

3   ^' 

^      ^  11 

N      t<  *< 

O  VJ 

i    a| 

0) 

</) 

e 

^ 

il 

o    2 

Sii 
1JJ 

-    *! 

3 

3 

z 

8        5 

£ 

/ 

J        §    ^ 

•3         •<     oi 

t  J>         .     S 

.5      ~j 

-    2! 

4 

ill 

|  .s 

i  |3j 

j$       07 
$       *    S 

2      S    S 

CO      i? 

-          2| 

c 

1  * 

<      ^ 

S. 

j||j 

r  §  f 

x    ^ 

pl^X 

•4                       —   T! 

I 

<   s 

M      b 

2s 

z^f 

e/io  vt 

-          2| 

1= 

2 

H      3 
w     o 

& 
1 

^    sl 

^s 

W       >J 

K    " 
• 

£ 

Hi  .1 

3 

S££ 

*• 
ej 

lo    ^* 
.    ^ 

• 
S3 
S 

| 

-     5! 

1 

U) 

?-^ 

3-     « 

fc 

i 

•    5! 

f 

0 

Z 
< 

II   1:   II 

II    II    II 

1       T» 

ac 

~ 

ii      2! 

c 

°, 

o-  ^V~  t^ 
c<  ^  r*- 

5-  60  3" 

^ 

s  i 

^ 

;.    sl 

< 

^  e»'  ^*' 

<^  i 
< 

h- 

Z 
=3 
O 

SI     1* 

S 
H 

j  .  . 

:       :       : 

i 

i 

.1  II 

a  '  * 

n    •»    in 

10      00     0 

*  i 

o 

_M5l 

i 

§<* 

1     ;! 

3  t 

£i 

ANALYSIS   OF   ACCOUNTS  551 

items  in  each  department  would  give  the  unit  of  cost  for 
handling  one  item  in  each  of  the  items  departments. 

"The  analysis  of  an  account  after  any  direct  elements  of 
cost  were  charged  directly,  would  appear  like  this:  In  the 
first  place,  you  have  the  general  daily  average  balance;  this 
is  the  average  balance  as  shown  by  the  ledger.  It  is  neces- 
sary to  reduce  this  average  by  the  average  amount  of  cash 
that  has  already  been  credited  up,  but  is  continually  out- 
standing in  the  process  of  collection;  the  remainder  of  the 
average  balance  thus  reduced  would  have  to  be  further  re- 
duced by  the  percentage  of  reserve  that  a  bank  is  required, 
either  by  the  national  or  State  law,  to  keep  idle  in  the  vault. 
The  final  result  is  the  available  loanable  balance  with  which 
a  bank  has  to  do  business.  This  available  balance  at  the 
average  earning  rate  of  interest  will  be  the  amount  the  ac- 
count would  earn.  To  this  amount  earned  must  be  added 
the  amount  of  exchange  earned  by  the  account.  The  two 
added  together  would  give  the  total  earning  capacity  of  the 
account  for  the  period  under  consideration. 

"On  the  other  side  of  the  analysis  would  appear  the  daily 
average  balances  at  the  unit  of  cost  per  dollar  for  adminis- 
tration, the  number  of  items  handled  in  each  department  at 
the  unit  of  cost  for  each  class  of  items,  the  amount  of  inter- 
est paid  to  an  account  on  its  net  average  balance,  and  the 
amount  of  exchange  paid  for  handling  the  out-of-town  items 
for  the  account.  All  the  costs  to  be  added.  The  difference 
between  the  two  sides  of  the  analysis  would  show  what  an  ac- 
count earned  or  cost  during  the  period. 

"In  all  banks  there  are  a  number  of  accounts  having 
some  peculiar  cost  or  earning  feature  attached  to  them  by 
reason  of  which  they  could  not  be  considered  in  a  class  with 
any  other  account;  such  accounts  would  have  to  be  analyzed 
separately.  It  would  be  impossible  to  analyze  each  account 
separately,  however,  therefore,  the  accounts  must  be  an- 
alyzed by  classes  or  groups. 

"For  this  reason  the  result  of  three  different  methods  of 
analysis  will  be  compared.  A  wide  margin  of  difference  will 
be  shown  to  exist  between  the  results  of  the  different 
methods:  (a)  The  lax  method  of  analyzing  an  account  by 
approximating  its  cost  through  estimating  the  cost  of  labor 
to  handle  it;  (b)  the  more  definite  analysis  of  an  account, 
but  still  without  proper  regard  for  the  indirect  or  'overhead' 


652  THE   PRACTICAL  WORK  OF   A   BANK 

charges;  and  (c)  the  analysis  of  an  account  on  the  approved 
scientific  basis. 

"In  order  to  make  the  illustration  more  clear  the  same 
large,  very  active  account  with  an  average  balance  of,  say, 
$1,000,000  will  be  used  in  each  case.  The  period  of  time 
under  consideration  is  one  year.  Regarding  the  compara- 
tive worth  of  the  different  methods  used  and  the  results  ob- 
tained certain  definite  conclusions  may  be  arrived  at.  The 
account  used  to  illustrate  may  be  said  to  be  an  extreme  ex- 
ample; still  it  is  a  possible  one  and  the  final  result  in  exam- 
ple 'C'  will  indicate  how  unproductive  an  apparently  valu- 
able account  may  be. 

"In  the  first  example,  'A',  a  common  method  used  at 
present  is  to  attempt  to  arrive  at  the  cost  of  an  account  by 
determining  the  labor  or  clerk  hire  expense.  This  is  accom- 
plished by  averaging  the  cost  of  clerk  hire  and  estimating  its 
value  as  in  the  following  illustration.  Some  bank  officers  are 
willing  to  guess  at  the  earning  capacity  of  an  account.  They 
consider  only  the  cost  of  handling  on  a  direct  basis,  elimi- 
nating the  important  elements  of  administration  expenses, 
fixed  and  overhead  charges  attached  to  the  handling.  They 
merely  make  a  mental  calculation  to  allow  for  expenses  that 
do  not  appear  on  the  surface  and  assume  that  roughly  an 
account  is  worth  what  it  may  earn  on  the  gross  daily  average 
balance  less  the  direct  expense  of  handling.  To  make  the 
contrast  between  the  three  different  methods  of  analysis 
more  striking  the  average  balance  in  example  'A'  will  not  be 
reduced  by  the  amount  in  transit  or  the  reserve  held  against 
the  deposit. 

EXAMPLE  "A". 

ESTIMATED  COST  ACCOUNT 

Daily  average  balance,  $1,000,000. 

Average  earning  rctr  4y2% $45,000.00 

line  man  2%  hours  dai^   account  current  for  year $757.30 

Two  men  15  minutes  daily  to  handle  acceptances 151.30 

Three  men  2%  hours  4  times  a  year,  account  dividends 30.00 

One  man  10  minutes  daily  to  examine  indorsements 32.00 

Four  men  20  minutes  daily  examining  signatures 99.40 

One  man  four  times  a  year  15  minutes,  special 79.00 

One  man  10  minutes  daily  handling  checks 50.50 

Total  cost  of  handling  account — 1,199.50 

Estimate  value  of  account  for  year $43,800.50 


ANALYSIS    OF    ACCOUNTS  558 

"According  to  the  foregoing  example  'A'  the  estimated 
labor  cost  of  handling  the  account  for  the  year  would 
amount  to  $1,199-50,  while  the  daily  average  balance  of  $1,- 
000,000  would  have  earned  $45,000  at  the  average  earning 
rate  of  four  and  one-half  per  cent. 

"The  estimated  cost  of  clerk  hire  in  connection  with  an 
account,  however,  is  not  accurate  enough  to  cover  the  cost  of 
handling  even  without  considering  any  other  direct  or  indi- 
rect expenses  attached  to  an  account.  There  is  considerable 
time  of  clerk  hire  which  is  lost  or  unaccounted  for;  therefore, 
this  method  of  estimating  the  cost  of  an  account  is  very  in- 
accurate. Further,  to  assume  that  a  daily  average  balance, 
as  shown  by  the  books  represents  actual  loanable  funds,  is  a 
false  position,  for  a  daily  average  balance  usually  contains 
items  taken  for  cash  that  are  outstanding  in  the  process  of 
collection;  and  also  no  allowance  has  been  made  for  the 
twenty-five  per  cent,  reserve. 

"In  the  following  example  'B'  all  the  direct  cost  of  labor 
will  be  charged  to  each  of  the  'labor'  or  'items'  departments, 
so  that  the  lost  time  unaccounted  for  above  may  be  included. 
Dividing  the  total  cost  of  labor  charges  to  each  of  the  'items' 
or  'labor'  department  by  the  number  of  items  handled  in 
each  department  during  the  period  will  give  the  unit  of  cost 
for  each  item  on  the  basis  of  direct  expense  only. 


EXAMPLE  "B". 
A  MORE  CAREFUL  ANALYSIS  OF  THE  FACTS. 


Daily    average    balance $1,000,000 

Less  average  amount  in  transit 200,000 

$800,000 
Less  25%    reserve 200,000 


Actual  usable  balance 600,000 

Earning  at  average  4%%  on  $600,000 $27,000.00 

270,000  items  receiving  teller  at  .004= 1,080.00 

202,000  items  clearing  house  at  .0011  = 222.20 

85,000  items  check  desk  at  .0075  = 265,50 

32,000  items  city  collections  at  .01  = 320.00 

1,000  items  transit  desk  at  .005  = 5.50 

104,000  items  from  clearing  house  at  .0075  = 780.00 

$2,673.20 


Value  of  the   account   for  year $24,326.80 


564  THE   PRACTICAL  WORK  OF   A   BANK 

"In  the  foregoing  example  'B'  the  direct  cost  of  labor 
alone  has  been  charged  to  each  department,  eliminating  the 
indirect  charges.  The  unit  of  cost  of  each  item  in  each  dif- 
ferent department  has  been  found  by  dividing  the  direct  ex- 
penses charged  to  each  department  by  the  number  of  items 
handled.  Multiplying  the  number  of  items  handled  for  the 
account  in  each  department  by  the  unit  of  costs  for  items  of 
its  class,  will  give  the  total  cost  for  all  items  of  that  particu- 
lar class.  In  this  example  the  daily  average  balance  has 
been  reduced  by  $200,000,  the  average  amount  in  transit, 
and  also  by  a  further  reduction  of  $200,000  for  the  twenty- 
five  per  cent,  reserve.  The  earning  capacity  of  the  account 
in  example  'A'  was  $45,000,  no  allowance  being  made  for 
transit  items,  or  reserve,  while  in  example  'B'  the  earning 
capacity  was  $27,000  after  proper  allowance  has  been  made 
for  transit  items  and  reserve.  But  this  is  not  the  real  point 
of  difference  between  the  two,  for  if  no  actual  calculation 
were  made  to  cover  transit  items  and  reserve  in  example  'A' 
a  certain  mental  allowance  would  be  made  for  same.  The 
real  difference  between  example  'A'  and  example  'B'  is  that 
the  cost  of  handling  items  for  the  account  is  more  than 
double  in  the  latter  where  the  unit  of  cost  per  item  is  used 
as  a  basis,  than  in  the  former  where  the  approximate  aver- 
age time  of  clerk  hire  is  used  as  a  basis. 

"In  neither  of  the  foregoing  examples  has  attention  been 
paid  to  the  apportionment  of  the  overhead  charges,  the  fixed 
charges,  or  the  administration  expenses  that  are  incurred  in- 
directly. Many  other  important  elements  have  also  been 
purposely  omitted  from  examples  'A'  and  'B'  in  order  to 
emphasize  their  value  and  importance.  These  elements 
should  be  included  in  any  analysis  that  is  to  be  complete 
and  accurate.  These  elements  are  cost  of  administration  ex- 
penses attached  to  the  handling  of  the  dollars  of  balance,  in- 
terest paid  to  the  depositor  on  his  average  balance,  special 
work  and  specific  expenses. 

"In  the  following  example  'C'  all  the  scientific  principles 
that  have  been  evolved  to  date  will  be  used  to  demonstrate 
the  correctness  of  the  theories  set  forth: 


ANALYSIS   OF   ACCOUNTS  655 

EXAMPLE  "C". 
APPLICATION  OF  THE  SCIENTIFIC  PRINCIPLES. 

Daily  average  balance $1,000,000 

Less  average  amount  in  transit 200,000 

Net  average  balance   800,000 

Less  25%   reserve   200,009 

Actual  usable   balance $600,000 

Earning  an  average   of  4y2%   on  $600,000 27,000 

Exchange  received  A 20 

Total  earning  capacity $27,020.00 

Cost  of  handling: 

270,000  items  receiving  teller  at  .008 $2,160.00 

202,000  items  clearing  house  at  .0022 444.40 

35,000  items  check  desk,  in,  at  .015 525.00 

32,000  items  city  collections  at  .02 640.00 

1,000  items  transit  desk  at  .011 11.00 

104,000  items  check  desk,  out,  at  .015 1,560.00 

Currency,  one  man  1  hour  daily 150.00 

Special    work    43.81 

Clearing  House    36.84 

Exchange    cost    5.00 

$1,000,000  daily  average  balance,  cost  of  administration 5,000.00 

2%  interest  on  net  average  balance  of  $800,000 16,000.00 

$26,576.05 


Net  value  of  the  account  for  year $443.95 

"It  will  be  noticed  in  example  'C'  the  unit  of  cost  of 
handling  an  item  is  twice  the  amount  of  the  corresponding 
unit  of  cost  as  shown  in  example  'B',  for  the  reason  that  the 
direct  expenses  together  with  a  proper  proportion  of  the 
overhead  charges  have  been  added;  that  is,  the  direct  and 
also  the  indirect  expenses  are  included  in  the  unit  of  cost  in 
example  'C'.  Further  it  will  be  noticed  example  'C'  con- 
tains other  expenses  and  outlays  that  do  not  appear  in  either 
of  the  other  two  examples. 

"In  the  scientific  analysis  'C'  it  is  intended  to  include 
every  possible  cost  attached  to  an  account,  and  also  to  show 
every  earning  made  by  an  account ;  therefore,  certain  factors 
that  have  a  prominent  place  in  the  accurate  analysis  'C'  have 
no  place  in  either  of  the  other  examples- -'A'  and  'B'. 

"In  comparing  the  earning  capacity  of  the  three  methods 
of  analysis  it  would  be  unfair  to  assume  that  in  example 
'A'  $45,000  would  actually  represent  what  the  account 
earned,  for  certain  mental  allowances  are  to  be  made  for 
outstanding  cash  in  transit  and  also  the  twenty-five  per  cent, 
reserve.  The  important  thing  is  to  definitely  state  the  daily 


666  THE    PRACTICAL  WORK   OF   A   BANK 

average  balance  properly  reduced  by  these  two  factors  in 
the  analysis,  as  is  done  in  the  case  of  examples  'B'  and  'C'. 
It  is  also  important  to  make  allowance  for  the  exchange 
earnings,  even  though  the  amount  appears  to  be  small. 

"There  are  two  elements  of  expense  in  example  'C':  the 
cost  of  administering  the  dollars  of  balance,  $5,000,  and  the 
interest  paid  to  the  depositor,  $16,000.  While  some  mental 
allowance  has  been  made  for  these  items  in  example  'A'  and 
example  'B'  they  do  not  definitely  appear  on  the  analysis 
sheets  now  in  common  use.  In  connection  with  the  interest 
paid  by  banks  to  their  depositors  it  is  well  to  note  that  banks 
pay  interest  on  the  net  average  balance,  that  is,  the  net  aver- 
age balance  before  it  has  been  reduced  by  the  twenty-five 
per  cent,  reserve  which  has  to  be  kept  idle  and  unproductive 
in  the  vault;  furthermore,  the  banks  pay  a  flat  rate  of  two 
per  cent,  rather  than  a  graduated  rate  that  bears  some  rela- 
tion to  the  fluctuating  earning  rate." 

"By  comparing  the  final  results  of  the  three  different 
methods  it  will  be  seen, how  easy  it  is  to  be  misled  in  guess- 
ing at  the  value  of  an  account.  In  example  'A'  the  cost  of 
handling  the  account  by  averaging  clerk  hire,  was  $1,199.50; 
in  example  'B'  by  using  the  direct  elements  of  expense  only, 
the  cost  was  $2,673.20;  while  in  example  'C',  where  both 
direct  and  indirect  elements  were  employed,  the  cost  was 
$5,576.05.  Assuming  that  the  mental  allowance  of  interest, 
$16,000,  and  cost  of  administration  balance,  $5,000,  were 
equal  in  all  three  examples  the  application  of  the  scientific 
principles  of  cost  accounting,  which  includes  all  elements  of 
cost  earning,  is  the  only  accurate  method  of  measuring  the 
value  of  an  account. 

"In  order  to  arrive  at  the  different  units  of  cost,  both  the 
unit  of  cost  on  the  basis  of  items  to  be  handled,  and  the  univ 
of  cost  on  the  basis  of  dollars  to  be  administered,  it  is  neces- 
sary to  separate  the  two  different  classes  of  expense  appli- 
cable to  each.  The  total  gross  operating  expense  is  a  cer- 
tain amount  which  includes  every  outlay  of  every  character, 
the  proper  proportion  of  which  must  be  borne  by  the  labor 
or  'items'  departments,  on  the  basis  of  items  to  be  handled; 
and  the  proper  proportion  must  also  be  borne  by  the  earn- 
ing or  administration  departments  on  the  basis  of  dollars  of 
balance,  left  on  deposit,  to  be  administered.  The  accounts 
must  bear  the  total  gross  operating  expenses  evenly  appor- 


ANALYSIS    OF    ACCOUNTS  557 

tioned,  both  on  the  basis  of  balance  loaned  and  on  the  basis 
of  items  handled. 

"Reducing  the  total  gross  operating  expenses  by  the 
amount  of  direct  expense  charged  to  the  different  'items' 
departments,  and  distributing  it  among  the  'items'  depart- 
ments, will  leave  an  amount  of  general  operating  expense. 
Beside  the  direct  expense  charged  to  'items'  departments  a 
proper  proportion  of  indirect  expense  must  also  be  charged 
to  cover  'overhead'  and  administration  cost;  then  according 
to  the  theories  set  forth  herein  before,  the  proportionate 
rates  which  the  direct  expense  of  all  the  'items'  departments 
bear  to  the  general  operating  expenses  (that  is,  the  total 
gross  operating  expenses  after  they  have  been  reduced  by 
the  direct  expenses  charged  to  the  items  departments),  is  the 
amount  to  be  further  deducted  and  distributed  proportion- 
ately among  the  different  'items'  departments  for  the  indi- 
rect expense. 

"To  illustrate :  In  the  receiving  teller's  department  there 
is  a  direct  expense  of,  say,  $10,000  or  $15,000  which  gives  a 
unit  of  cost  in  example  'B'  of  .004  per  item.  However,  to 
this  direct  expense  must  be  added  the  proper  proportion  of 
indirect  expense,  say,  in  this  case,  some  $10,000  or  $15,000 
more;  these  direct  and  indirect  expenses  added  together  and 
divided  by  the  number  if  items  handled,  gives  the  unit  of 
cost  in  example  'C'  .008,  or  twice  the  amount  of  the  corre- 
sponding unit  of  cost  in  example  'B'.  The  same  rule  holds 
for  all  the  other  items  departments. 

"The  remainder  of  the  general  operating  expenses  after 
direct  and  indirect  expenses  of  'items'  department  have  been 
deducted,  is  the  net  general  operating  expense  or  cost  for 
administering  the  dollars  of  deposit.  Dividing  this  amount 
by  the  daily  average  of  all  deposits  will  give  the  unit  of  cost 
on  one  dollar,  in  this  case  .005." 

Like  all  other  matters  of  arithmetical  calculation  cost 
accounting  can  be  carried  to  such  an  extreme  that  only  a 
mathematician  can  understand  the  process,  but  all  will  agree 
that  it  is  worthy  of  the  study  the  problem  invites.  It  is  bet- 
ter to  be  too  analytic  than  too  lax;  to  be  over- technical  than 
careless.  Mr.  W.  A.  Buckley,  assistant  cashier  of  the 
Fourth  Street  National  Bank  of  Phila.,  Pa.,  has  given  close 
and  careful  study  to  the  question,  and  approaches  the  sub- 
ject with  an  eye  to  minutiae  that  is  admirable.  By  reason  of 


558  THE    PRACTICAL   WORK   OF   A   BANK 

the  care,  the  thought  and  the  scientific  results  possible  in  such 
process,  the  paper  read  by  Mr.  Buckley  before  the  conven- 
tion of  the  American  Institute  of  Banking  at  Rochester  in 
1911  is  herewith  given  in  full: 


COST  SYSTEM  BASED  ON  EXPENSES 

"The  cost  system  that  should,  appeal  to  bankers  is  one, 
by  the  use  of  which,  it  will  not  be  necessary  to  make  an  anal- 
ysis more  than  once  in,  say,  two  years.  Such  a  method 
should  necessitate  a  minimum  amount  of  effort,  as  the  cost 
units  once  found  are  practically  permanent. 

"The  following  described  method  is  based  entirely  upon 
the  expenses  of  the  bank,  which  are  separated  into  two 
classes;  those  caused  by  lending  funds,  and  those  caused  by 
the  activity  of  accounts. 

"If  all  of  the  expense  caused  by  an  account  for  one 
month  be  deducted  from  its  possible  gross  earning  capacity, 
based  on  the  average  loanable  rate  of  funds  for  the  month, 
the  result  will  be  the  net  profit. 

"With  the  method  herein  suggested,  it  will  be  necessary 
to  have  an  analysis  card  for  each  account,  with  space  for 
twelve  months'  figures.  The  card  should  show  for  each 
month  the  average  ledger  balance,  the  average  amount  of 
out-of-town  items  in  the  process  of  collection,  the  net  work- 
ing balance  in  bank,  the  amount  of  interest  paid,  the  cash 
cost  of  collecting  out-of-town  items.  In  the  latter  column 
should  be  entered  in  red  ink  the  cost  of  special  check  books. 
A  column  should  be  provided  for  the  cost  of  administration 
based  upon  the  number  of  items  handled  for  the  account  in 
a  given  month. 

"With  the  data  on  the  analysis  card,  the  profit  on  the 
account  can  be  readily  ascertained  by  using  the  average  rate 
per  cent,  on  loans  and  investments  for  the  month. 

"Illustration:  Suppose  the  data  to  be  as  follows:  Aver- 
age ledger  balance,  $10,000;  average  amount  outstanding, 
$2,500;  net  working  balance,  $7,500;  interest  paid,  $16.43; 
cash  cost  of  collecting  out-of-town  items  (exchange  paid), 
$3.50;  average  loanable  rate  on  loans  and  investments,  4.5 
per  cent,  (approximated) , 


ANALYSIS    OF    ACCOUNTS  559 

Average    balance    $10,000.00 

Outstanding    2,500.00 

Net  working  balance  $7,500.00 

Income  on  three-fourths  of  this  amount,  one-fourth  in  reserve  (reserve 

city  basis)  at  4.5  per  cent,  for  one  month $21.08 

Income  from  reserve  agents  at  2  per  cent,  on  one-eighth  of  the  amount  1.54 


Less  interest  paid    $16.43 

Exchange   paid    3.50 

19.93 

Profit  for  month  $2.69 

"If  a  bank  collects  all  of  its  out-of-town  items  through 
its  reserve  agents  at  par,  it  is  under  no  expense  in  this  re- 
spect, except  for  postage  and  stationery,  and  the  ordinary 
analysis  referred  to  above  is  unnecessary.  Where,  however, 
a  bank  is  under  expense  in  collecting  any  out-of-town  items 
deposited,  either  in  exchange  charges  or  in  time  outstanding 
before  returns  are  received,  such  items  should  be  subjected 
to  an  analysis.  As  nearly  all  banks  make  some  attempt  at 
an  analysis  covering  out-of-town  business,  it  will  not  be 
necessary  to  go  into  further  details. 

"If  a  bank's  accounts  were  all  inactive,  the  only  em- 
ployees necessary  would  be  the  officials  required  by  law, 
clerks  for  the  discount,  collateral  and  credit  departments, 
together  with  sufficient  office-room  for  their  accommodation, 
a  board  room,  a  vault  and  space  for  bookkeeping.  The 
items  of  postage  and  stationery  would  not  be  worth  consid- 
eration, and  the  other  expenses  enumerated  above  would  be 
properly  chargeable  to  the  income  on  loans  and  investments, 
because  it  is  incurred  in  the  making  and  caring  for  loans. 
In  addition  to  the  expense  of  making  and  caring  for  loans, 
the  handling  of  cash  and  time  collections  deposited,  deposit 
tickets,  cash  and  collection  letters,  the  currency  received  and 
paid,  and  the  checks  and  drafts  paid  and  charged  to  ac- 
counts cause  the  expenses  chargeable  to  administration. 

ANALYZING  THE  EXPENSE  ACCOUNT 

"The  cost  of  administration  is  composed  of  two  elements : 
(a)  The  expense  of  lending  the  money  deposited;  (b)  the 
expense  caused  by  the  activity  of  accounts.  If  the  propor- 
tionate amount  of  the  expense  of  administration  be  ascer- 
tained and  added  to  the  cost  shown  by  the  usual  analysis, 
the  worth  of  every  account  is  known. 


560  THE    PRACTICAL  WORK  OF   A   BANK 

"In  order  to  ascertain  the  proportionate  amount  of  ex- 
pense chargeable  to  A  and  B,  it  will  be  necessary  to  careful- 
ly analyze  the  expense  account  for  a  period  of  six  months, 
and  then  take  the  average  amount  for  one  month.  If  some 
expenses  are  paid  annually,  only  one-half  of  such  sums  may 
be  included;  and  if  any  expenses  are  heavier  in  one  semi- 
annual period  than  the  other,  they  should  be  analyzed  for  one 
year  and  then  averaged  for  one  month. 

"An  approximation  should  be  made  of  the  percentage  of 
the  floor  space  used  by  the  several  departments  to  the  total 
space  occupied,  to  ascertain  the  proportionate  cost  of  each 
department  for  rental.  If  the  bank  owns  its  building,  the 
amount  at  which  it  is  carried  on  the  books,  taken  at  the  aver- 
age loanable  rate  on  money  during  the  preceding  six  months 
should  be  used  for  rental  cost,  taking  one  month's  rental  as 
a  basis.  Banks  carrying  on  their  books  the  amount  expend- 
ed for  furniture  and  fixtures  should  figure  the  interest  on 
such  sum  for  one  month.  If  this  has  been  absorbed  in  the 
expense  account,  the  amount  may  be  approximated  and  the 
interest  for  one  month  ascertained. 

"Expenditures  for  new  typewriters,  listing  and  adding 
machines  and  other  labor-saving  devices,  should  not  be  in- 
cluded; but  the  yearly  cost  (for  one  month)  of  such  ma- 
chines should  be  entered  under  the  salaries  of  the  depart- 
ments using  them.  The  yearly  cost  is  ascertained  by  taking 
the  original  price,  less  the  rebate  allowed  when  it  is  ex- 
changed for  a  new  one,  and  dividing  the  amount  by  the  num- 
ber of  years  the  machine  can  be  used. 

"(A)  As  it  is  impossible  to  make  and  care  for  loans 
without  incurring  some  expense,  it  is  essential,  for  the  pur- 
poses of  analysis,  to  know  the  cost  of  keeping  funds  in  the 
form  of  loans  and  investments.  To  ascertain  this  cost  it  will 
be  necessary  to  bring  together  the  expenses  of  the  officials 
who  pass  upon  loans  and  credits  and  the  discount,  collateral 
and  credit  departments  for  salaries,  surety  bonds,  rental  for 
floor  space,  stenographic  work,  luncheons,  light,  heat,  tele- 
grams, telephone  service,  expressage,  postage,  stationery 
and  sundries.  To  this  amount  should  be  added:  Retaining 
fee  to  counsel.  Government  excise  tax,  rental  for  floor  space 
occupied  by  the  board  room,  vault  and  corridor  space  lead- 
ing to  the  quarters  of  the  officials  who  pass  upon  loans  and 
credits,  compensation  to  directors  (if  any),  subscriptions  to 


ANALYSIS   OF   ACCOUNTS  561 

various  trade  organizations,  credit  bureaus,  etc.  The  total  is 
the  expense  of  making  and  taking  care  of  loans  for  one 
month. 

"After  deducting  the  various  expenses  mentioned  above, 
the  following  are  found  to  be  chargeable  to  the  activity  of 
accounts:  Rental  for  space  occupied  by  departments  hand- 
ling items  and  quarters  of  the  cashier,  assistant  cashier,  ste- 
nographers and  audit  departments,  lobby  space  used  by  cus- 
tomers leading  to  the  various  departments,  stationery 
closets,  letter  files  and  lockers;  salaries  of  officers  in  charge 
of  administration,  salaries  of  departments  handling  items, 
and,  in  addition,  salaries  of  audit  department,  stenographers, 
telegraph  clerk,  telephone  operator,  day  and  night  watch- 
men, letter  filing  clerk,  messengers  and  porters;  clearing- 
house expenses,  luncheons;  expense  for  postage,  stationery, 
light,  heat,  premium  on  surety  bonds  of  officials  and  clerks 
named  above,  telephone  service,  telegrams,  expressage  and 
sundries. 

"As  the  analysis  card  shows  the  amounts  of  interest  and 
exchange  paid,  and  cost  of  special  check  books,  these  ex- 
penses should  not  be  included.  The  following  named  ex- 
penses are  not  chargeable  to  either  A  or  B:  State  tax; 
properly  chargeable  to  income  derived  from  the  capital 
stock.  Semi-annual  duty  on  circulation;  expressage  on  cir- 
culation, and  other  expenses  on  circulation,  all  of  which  are 
properly  chargeable  to  income  received  on  United  States 
Government  bonds. 

"The  cost  of  clearing-house,  Government  and  other  ex- 
aminations should  be  approximated  between  A  and  B. 

"Whether  or  not  certain  expenses  are  chargeable  to  A 
or  B  is  certainly  a  proper  subject  for  careful  consideration 
and  discussion,  and  in  formulating  a  system  for  ascertain- 
ing cost-units  every  bank  must  decide  them  for  itself.  The 
following  have  not  been  included  under  either  A  or  B :  Cost 
of  analysis  department;  advertising,  and  postage  used  in 
connection  therewith;  salary  and  expenses  of  traveling  man; 
losses  on  loans  and  fees  to  counsel  (other  than  the  annual 
retainer) . 

"  (A)  It  is  suggested  that  the  expense  incurred  in  mak- 
ing and  taking  care  of  loans  be  considered  as  a  certain  per- 
centage of  the  average  loanable  rate  on  funds,  and  that 
when  this  percentage  is  ascertained  it  be  deducted  from  the 

37 


562  THE    PRACTICAL  WORK  OF   A   BANK 

rate,  using  the  reduced  rate  in  computing  the  profit  on  an 
account. 

"To  find  the  rate  per  cent,  on  loans  representing  the 
expense  of  making  and  caring  for  loans,  ascertain  the  aver- 
age daily  balance  of  loans  and  investments,  not  including 
United  States  bonds  and  premium  on  United  States  bonds 
for  a  period  of  six  months.  Multiply  the  loan  expense  by 
twelve  (to  get  the  yearly  expense).  Divide  this  amount  by 
the  average  daily  amount  of  loans  and  investments.  The 
result  will  be  the  rate  per  cent,  to  be  deducted  from  the  aver- 
age loanable  rate  for  funds. 

"Illustration:  Suppose  the  average  loanable  rate  for 
funds  for  a  given  month  to  be  5.25  per  cent,  and  that  for 
the  past  six  months  the  balance  of  loans  and  investments, 
not  including  United  States  bonds  and  premium  on  United 
States  bonds,  averaged  $18,978,000.  Expense  incurred  in 
lending  funds  (for  one  month)  is  $3,352.78.  Multiplying  this 
amount  by  twelve  (to  get  the  yearly  expense)  gives  $40,233. 
Dividing  this  amount  by  $18,978,000  gives  .00212  or  .212 
per  cent.;  subtracting  .212  per  cent,  from  the  rate  for  funds, 
5.25  per  cent.,  gives  5.038  per  cent.,  which,  therefore,  should 
be  used  as  the  net  loanable  rate  for  funds  in  computing  the 
profit  on  accounts. 

"This  formula  apportions  the  expense  on  the  average 
amount  of  loans  and  investments  and,  therefore,  gives  to  the 
capital  stock,  surplus  and  net  profits,  which  are,  of  course, 
in  the  form  of  loans  and  investments,  their  proportionate 
amount  of  the  expense  incurred. 

"  (B)  To  ascertain  the  cost  units  for  the  various  classes 
of  items  passing  through  the  bank,  it  will  be  necessary  to 
count  the  number  of  items  received  by  the  bank  for  one 
month  from  each  individual  and  bank  account,  and  the  num- 
ber of  checks  and  drafts  paid  and  charged  to  each  account. 

"The  analysis  of  the  expense  account  should  embrace  a 
thorough  examination  of  the  amount  expended  for  station- 
ery, so  as  to  apportion  it  among  the  several  departments 
handling  items.  This  amount  goes  into  the  first  element  of 
cost  (see  First  Cost) .  Stationery  used  by  officials  and  other 
departments  in  which  items  are  not  handled  goes  into  the 
second  element  (see  Second  Cost). 

"As  certain  expenses  are  incurred  because  of  individual 
depositors  alone,  it  is  suggested,  if  extreme  accuracy  be  de- 


ANALYSIS   OF   ACCOUNTS  568 

sired,  that  they  be  apportioned  only  to  this  class  of  deposi- 
tors on  the  basis  of  the  number  of  items  handled  for  each 
account.  In  this  class  of  expenses  may  be  mentioned :  Rental 
of  lobby  space  used  by  customers  in  front  of  receiving,  pay- 
ing and  other  departments  handling  business  for  individual 
depositors  only;  salaries  of  clerks  at  counters  in  these  de- 
partments; cost  of  stock  check-books,  deposit-tickets  and 
pass-books. 

"When  the  number  of  items  handled  during  the  month 
has  been  ascertained,  the  record  will  show  the  number  de- 
posited, by  each  individual  and  bank  account,  of  each  of  the 
following  mentioned  items :  City  collections,  out-of-town  col- 
lections, city  clearing-house  and  runners'  items,  out-of-town 
cash  items,  and,  in  addition,  the  number  of  checks  and  drafts 
paid  and  charged  to  each  individual  and  bank  account.  In 
the  case  of  city  items  (both  cash  and  time)  it  would  be  well 
to  count  separately  the  clearing-house  items,  trust  company 
items,  and  other  items  requiring  presentation  by  the  runners. 

"As  the  figures  for  any  one  month  will,  in  the  majority 
of  cases,  be  a  fair  index  to  the  average  number  of  items 
handled  for  an  account,  the  number  of  each  kind  of  items 
should  be  entered  on  the  analysis  cards  for  reference.  It  is 
hardly  practicable  to  approximate  the  cost  of  handling  coin 
and  currency,  and  it  would  be  well  to  assume  that  every 
account  makes  deposits  and  withdrawals  thereof  in  fair  pro- 
portion to  the  number  of  items  deposited.  Due  allowance 
should  be  made,  of  course,  for  accounts  that  are  exceptions 
to  this  general  rule.  As  the  number  of  deposit-tickets  and 
letters  received  must  necessarily  be  much  smaller  than  the 
number  of  items  which  accompany  them,  it  would  likewise 
be  well  not  to  compute  the  cost  of  these  separately,  but  to 
let  it  go  into  the  cost  of  handling  the  items. 

"If  it  be  desired  to  know  the  cost  of  issuing  drafts  drawn 
on  reserve  agents  and  other  out-of-town  correspondents,  it 
will  be  necessary  to  divide  the  salary  of  the  exchange  clerk, 
together  with  the  cost  of  the  drafts,  advices  and  postage 
thereon,  into  the  number  issued  during  the  month.  Should 
the  exchange  clerk  have  other  duties,  approximate  the  time 
given  to  writing  drafts  and  advices. 

"The  cost  of  handling  time  collections  is  considerably 
greater  than  that  of  cash  items,  because  of  the  complete 
record  that  has  to  be  made  of  the  former,  the  separate  en- 


564  THE    PRACTICAL  WORK   OF   A   BANK 

tries  that  have  to  be  made  of  each  time  collection  in  the 
bookkeeping  department,  tracing,  advising  payment  and 
other  details.  In  the  case  of  city  collections  there  is  an  ad- 
ditional expense  for  postage  on  notices  and  the  cost  of  tele- 
phone service,  which  materially  increases  the  cost. 

"It  will  be  found  that  it  costs  more  to  handle  items  de- 
posited by  individuals  than  by  banks,  that  out-of-town  cash 
items  are  more  expensive  than  clearing-house  items;  that 
trust  company  items  are  more  expensive  than  clearing-house 
items;  that  other  runners'  items  are  much  more  expensive 
than  trust  company  items ;  that  the  drafts  paid  and  charged 
to  accounts  are  considerably  more  expensive  than  out-of- 
town  cash  items,  and  that  time  items  are  from  six  to  eight 
times  as  expensive  as  out-of-town  cash  items. 

"In  making  up  the  cost  unit  it  must  be  borne  in  mind 
that  it  consists  of  five  elements:  First,  the  expenses  of  the 
several  departments  that  handle  the  items;  second,  the  ex- 
penses of  the  officials  and  clerks  who  do  not  directly  handle 
the  items,  and  sundry  other  expenses;  third,  clearing-house 
expenses;  fourth,  postage;  and  fifth,  cost  of  telephone  ser- 
vice. 

"First  Cost. — In  order  to  ascertain  the  first  cost  the  fol- 
lowing departments  must  be  considered,  because  they  direct- 
ly take  care  of  the  items :  Paying,  receiving  and  note  tellers, 
runners,  transit,  out-of-town  collection,  city  collection,  in- 
dividual ledger  and  bank  ledger. 

"From  the  analysis  already  made  of  the  expense  account 
the  cost  of  each  of  these  departments  has  been  ascertained 
for  salaries,  premiums  on  surety  bonds,  rental  of  adding  and 
listing  machines  and  typewriters,  stationery  and  rent.  It 
will  not  be  necessary  to  ascertain  the  cost  per  item  for  these 
separately,  as  by  adding  them  the  net  result  is  obtained  by 
a  single  operation. 

THE  COST  OF  HANDLING  AN  ITEM 

"To  ascertain  the  cost  of  handling  an  item  as  it  goes 
through  the  bank,  make  a  record  of  the  number  of  items 
handled  by  each  department.  As  all  items  are  handled  more 
than  once,  it  is  necessary  to  make  a  record  of  them  in  every 
department  through  which  they  pass;  and,  if  they  are 
handled  twice  in  any  department,  the  number  so  rehandled 


ANALYSIS    OF    ACCOUNTS  566 

must  be  set  down  twice.  This  must  be  done  so  that  the 
class  of  items  handled  twice  may  bear  its  proportionate 
amount  of  expense  to  the  department.  Divide  the  total  ex- 
pense of  each  department  by  the  number  of  items  handled. 
The  result  will  be  the  cost  in  the  department  for  each  sepa- 
rate item.  The  runners  collect  items  drawn  on  trust  com- 
panies, etc.,  not  represented  in  the  clearing-house,  and  other 
items  drawn  on  individuals,  firms  and  corporations.  As 
these  latter  items  take  up  a  considerable  portion  of  the  run- 
ners' time,  an  approximation  of  the  time  given  to  handling 
such  items  should  be  made  so  that  the  proper  cost  unit  for 
this  class  can  be  ascertained. 

"The  total  cost  of  each  class  of  items  is  made  up  of  the 
expense  incurred  in  the  handling  of  them  in  the  several  de- 
partments through  which  they  pass.  It  is  necessary,  there- 
fore, to  multiply  the  cost  unit  in  each  department  by  the 
number  of  items  in  each  class  which  it  has  handled  during 
the  month.  When  this  has  been  done  the  several  costs  of 
each  class  of  items  are  to  be  brought  together  to  ascertain 
the  total  cost.  Divide  the  total  cost  by  the  total  number  of 
items  in  the  class  to  ascertain  the  cost  of  each  separate  item 
in  the  particular  case. 

"Illustration:  Suppose  the  receiving  department 
handles  during  the  month  the  following:  Deposited  by  in- 
dividuals: 53,866  clearing-house  items,  70,949  runners' 
items;  113,517  out-of-town  cash  items.  Deposited  by  banks: 
53,185  clearing-house  items;  49,238  runners'  items;  110,527 
out-of-town  cash  items;  total  number  of  items  handled,  451,- 
282.  The  clearing-house  items  are  taken  care  of  in  the  re- 
ceiving department.  This  brings  the  total  number  of  items 
handled  up  to  558,333  (451,282  plus  53,866  plus  53,185). 
If  the  salaries  paid  to  this  department  amount  to  $765,  the 
premium  on  surety  bonds  to  $32,  the  rental  value  of  adding 
machines  to  $56,  the  rental  value  of  floor  space  to  $103  and 
the  stationery  cost  of  $32,  the  total  expense  is  $988.  Divid- 
ing the  expense  by  588,333  gives  the  cost  of  each  item,  name- 
ly, $0.001769.  Multiplying  the  number  of  items  in  each 
class  by  the  cost  unit  gives  the  cost  of  each  class  in  the  de- 
partment as  follows:  Deposited  by  individuals,  clearing- 
house items,  $95;  runners'  items,  $126;  extra  cost  of 
handling  clearing-house  items,  $95;  out-of-town  cash  items, 
$201.  Deposited  by  banks,  clearing-house  items,  $94;  run- 


566  THE   PRACTICAL   WORK  OF   A   BANK 

ners'  items,  $87 ;  extra  cost  of  handling  clearing-house  items, 
$94 ;  out-of-town  cash  items,  $196 ;  total,  $988. 

"It  will  be  noticed  that  the  cost  of  the  clearing-house 
items  is  made  up  of  the  cost  of  the  first  handling  and  the 
second  handling.  The  analysis  of  the  runners'  department 
will  give  the  cost  of  handling  the  runners'  items  in  that  de- 
partment. The  analysis  of  the  transit  department  will  give 
the  cost  of  handling  the  out-of-town  items  in  that  depart- 
ment. As  an  illustration,  the  cost  of  out-of-town  items  de- 
posited by  individuals  will  be  taken  not  only  for  the  first 
cost,  but  for  the  several  costs  making  up  the  total  expense. 
Suppose  the  cost  in  the  transit  department  is  $538.  As  the 
cost  in  the  receiving  department  is  $201,  the  total  cost  is 
$739,  or  $0.00651  per  item. 

"Second  Cost. — To  get  the  cost  per  item  in  this  class 
divide  the  total  number  of  items  of  all  classes  handled  dur- 
ing the  month  into  the  total  of  the  following  expenses :  Sala- 
ries of  officials  and  clerks  who  do  not  directly  handle  the 
items,  which  will  include  salaries  of  the  audit  department, 
messengers,  porters,  day  and  night  watchmen,  stenograph- 
ers, telegraph  clerk  and  filing  clerk,  rental  value  of  the  ex- 
ecutive offices,  lobby,  stenographers'  and  audit  departments, 
letter  files,  lockers  and  stationery  closets,  rental  value  of  add- 
ing, listing  machines  and  typewriters;  luncheons,  light,  heat, 
premium  on  surety  bonds,  telegrams,  expressage,  sundries 
and  stationery  used  by  officials  and  clerks  who  do  not  direct- 
ly handle  the  items. 

"Suppose  the  cost  per  item  to  be  $0.006309. 

"Third  Cost. — Clearing-house  expenses  should  be  appor- 
tioned to  checks  and  drafts  paid  and  charged  to  each  ac- 
count and  to  city  items  only.  To  get  the  cost  per  item,  di- 
vide the  clearing-house  expenses  by  the  number  of  city  cash 
and  time  items,  and  checks  and  drafts  paid  and  charged  to 
each  account. 

"There  is  no  expense  for  out-or-town  items  in  the  third 
cost. 

"Fourth  Cost. — From  the  amount  of  postage  properly 
chargeable  to  administration  expenses,  deduct  the  amount 
used  by  the  city  collection  and  runners'  departments  in  mail- 
ing notices  concerning  notes  and  drafts,  which  should  be 
added  to  the  cost  of  city  collections  and  runners'  items.  Into 
the  net  amount  of  postage  divide  the  number  of  out-of-town 


ANALYSIS   OF   ACCOUNTS  567 

collections  and  out-of-town  cash  items  handled.  The  result 
will  be  the  cost  per  item  for  postage  in  these  respective 
classes. 

"Suppose  the  cost  of  out-of-town  cash  items  to  be 
$0.003049  per  item. 

"Fifth  Cost. — This  embraces  telephone  service,  includ- 
ing salary  of  operator.  As  the  cost  of  out-of-town  calls 
made  for  customers  and  correspondents  is  usually  charged 
to  their  accounts,  such  part  of  the  expense  should  be  omitted. 
The  remaining  portion  of  cost  of  telephone  service  should 
be  apportioned  to  city  collections,  city  cash  items  and  drafts 
and  checks  paid  and  charged  to  each  account.  Approximate 
the  number  of  telephone  calls  made  during  the  month  in  con- 
nection with  city  collections,  runners'  items  and  drafts  and 
checks  paid,  and  apportion  the  cost  thereof  to  the  respective 
classes  of  items.  Apportion  the  remaining  cost  to  city  cash 
items.  To  get  the  cost  per  item,  divide  the  number  of  items 
in  the  class  into  the  cost  of  service. 

"There  is  no  expense  for  out-of-town  items  in  the  fifth 
cost. 

"If  it  be  determined  to  apportion  to  individual  depositors 
alone  the  salaries  of  the  clerks  at  the  counters  in  the  receiv- 
ing and  paying  tellers'  departments,  the  rental  value  of  the 
lobby  space  used  by  customers  and  the  cost  of  stock  check- 
books, pass-books  and  deposit-tickets,  there  will  be  a  cost  per 
item  for  the  expense. 

"Suppose  the  cost  per  item  to  be  $0.003187. 

"The  five  costs  enumerated,  and  the  extra  cost  noted 
above,  should  be  brought  together  and  the  total  will  be  the 
cost  of  handling  each  item  in  each  class. 

"Illustration:  Cost  of  out-of-town  items  deposited  by 
individuals : 

First   cost    $0.006510 

Second   cost    0.006309 

Third    cost    0. 

Fourth  cost    0.003049 

Fifth  cost   0. 

Extra  cost    , 0.003187 

Total  cost  per  item $0.019055 

"To  find  the  cost  of  an  account  for  the  month,  multiply 
the  number  of  items  in  each  class  handled  by  the  proper  cost 
unit  and  bring  together.  The  total  is  the  cost  of  adminis- 
tration for  the  account. 


868  THE   PRACTICAL  WORK  OF   A  BANK 

"It  is  but  fair  to  assume  that  most  accounts  deposit,  on 
the  average,  about  the  same  number  of  items  every  month, 
and  for  this  reason  it  is  not  necessary  to  ascertain  the  admin- 
istration expenses  oftener  than  once  every  year  or  two.  If 
there  be  a  change  in  the  character  of  the  account,  the  analy- 
sis department  should  make  a  recount  of  the  number  of 
items  handled.  The  same  method  can  be  used  (with  mod- 
ifications, of  course)  by  State  banks  and  trust  companies. 
In  the  case  of  trust  companies,  however,  the  analysis  would 
apply  to  the  banldng  department  only. 

"While  at  first  it  may  seem  difficult  to  make  an  analysis 
on  the  lines  outlined,  it  will  be  found  upon  examination  that 
the  procedure  is  not  involved  and  will  be  very  interesting 
and  the  results  obtained  of  great  importance  to  any  bank,  as 
the  worth  of  each  account  will  be  definitely  known." 

Note — Mr.  Buckley's  paper  has,  in  substance,  appeared  in  the  Banking  Law 
Journal  and  Journal  of  American  Bankers  Association.  Printed  here  by  cour- 
tesy of  the  author.  Mr.  EnselFs  matter  revised  and  arranged  by  himself. — W.  H. 
K.,  Jr. 


CHAPTER  XV  11. 

FOREIGN  AND  DOMESTIC  EXCHANGE 

It  would  be  quite  impossible  in  the  scope  of  this  work  to 
deal  extensively  or  adequately  with  the  subject  of  foreign 
exchange.  Therefore,  but  a  brief  resume  of  the  subject  can 
be  undertaken,  covering  (a)  the  origin  of  foreign  exchange; 
(b)  the  instruments;  and  (c)  the  general  principles  of  for- 
eign exchange  transactions. 

In  the  opening  chapter  it  was  said  that  trade  is  merely 
the  exchange  of  commodities  for  commodities.  This  is  true 
both  in  domestic  and  foreign  affairs.  One  section  sells  an- 
other section,  and  one  country  another.  The  South  sells 
New  England  cotton  and  buys  manufactured  goods.  The 
West  sells  the  East  meat,  fruits  and  grain,  and  buys  all 
sorts  of  manufactured  goods. 

Likewise  in  the  affairs  between  nations.  France  sells  the 
United  States  silks,  jewels,  wines,  etc.;  England,  the  prod- 
uct of  her  mills;  Germany,  dyestuffs,  toys  and  articles  pe- 
culiar to  German  manufacture.  All  three  nations  take  in 
exchange  wheat,  cotton,  meats,  raw  material  of  various 
kinds,  metals,  and  manufactured  goods.  But  inasmuch  as 
the  amounts  traded  in  do  not  balance,  one  country  buying 
more  than  it  sells,  there  is  a  difference  arising  that  must  be 
settled  in  money.  If  the  merchants  of  England  bought  of 
the  merchants  of  the  United  States,  and  the  American  mer- 
chants bought  of  English  houses  an  equal  amount  of  goods, 
the  merchants  of  England  could  pay  one  another  and  the 
merchants  of  America  likewise,  and  there  need  be  only  a 
transfer  of  debts  to  affect  the  balance.  Such  a  course  obtains 
only  in  a  limited  sense  and  by  a  complicated  process,  but 
the  principle  is  easily  understood. 

SETTLING  DEBTS  WITHOUT  MONEY 

The  method  by  which  debts  are  settled  by  offsetting  one 
against  the  other  is  simple.  If  two  men  owe  each  other  cer- 
tain amounts,  instead  of  each  paying  the  other  what  is  due, 
they  meet  and  adjust  the  difference;  they  have  "cleared" 

569 


670 


THE   PRACTICAL  WORK   OF   A   BANK 


their  debts  and  settled  the  balance.  Likewise  several  men 
may  settle  their  differences  by  a  few  payments  in  cash. 
Debts  are  settled  by  mutual  cancellations. 

To  illustrate  how  an  international  debt  is  cancelled  with- 
out the  use  of  money,  take  a  simple  proposition.  Let  us  sup- 
pose that  a  New  York  merchant  sells  to  an  English  mer- 


FIG.  7. 
BILL  OF  EXCHANGE   (iN  DUPLICATE) 

chant  $1,000  worth  of  goods.  An  English  merchant  has 
sold  a  New  York  merchant  a  bill  of  goods  likewise  amount- 
ing to  $1,000.  Payment  for  these  debts  might  be  made  by 
the  Englishman  sending  gold  to  New  York,  and  likewise 
New  York  sending  gold  to  England.  But  why  this  double 
trip  across  the  Atlantic?  Why  not  let  the  merchants  in 
New  York  settle  with  each  other,  and  the  English  merchants 
settle  with  each  other  and  effect  the  same  result?  Therefore, 
the  first  mentioned  New  York  merchant  draws  an  order  on 


FOREIGN    AND    DOMESTIC    EXCHANGE  571 

his  English  debtor  and  takes  it  to  the  other  New  York  mer- 
chant, who  is  in  debt  to  an  Englishman.  The  debtor  mer- 
chant pays  the  creditor  merchant  on  this  side.  The  bill  is 
sent  to  the  creditor  merchant  on  the  other  side  who  collects 
from  the  debtor  merchant  there,  and  both  transactions  are 
closed.  Thus,  the  two  debts  have  been  paid  without  ship- 
ping the  coin.  Upon  this  simple  principle  of  offsetting  debt 
against  debt  depends  all  exchange  operations,  foreign  and 
domestic.  Of  course,  direct  dealing  does  not  so  obtain,  but 
through  the  medium  of  banks  and  foreign  exchange  houses, 
essentially  the  same  process  takes  place;  the  instruments  in 
one  country  being  gathered  and  sent  to  the  other  for  collec- 
tion and  credit,  whatever  balance  remains  being  adjusted 
from  time  to  time  in  gold. 

ORIGIN  or  FOREIGN  DEBTS 

Debts  created  abroad  arise  from  three  main  sources:  (a) 
Goods  purchased  abroad;  (b)  insurance  and  freights  paid 
by  American  merchants  to  foreign  houses.  England  being 
the  great  insurance  and  carrier  nation  of  the  world,  the 
freights  carried  in  English  vessels  are  one  of  the  principal 
items  in  the  balance  against  us;  (c)  securities  held  abroad 
upon  which  interest  must  be  paid  (also  maturing  securities 
or  those  sold  by  foreign  holders)  ;  (d)  travelers'  expenses 
while  abroad,  which  are  enormous. 

The  "balance  of  trade"  is  the  net  amount  due  to  or  from 
another  country,  and  depends  upon  the  volume  of  trading 
one  country  does  with  another.  The  nation  that  buys  more 
than  it  sells — owes  more  than  it  has  due  to  it — is  the  debtor 
nation,  and  the  trade  balance  is  against  it,  and  must  settle 
in  money  at  the  will  of  the  creditor. 

The  sources  of  foreign  exchange  are:  (1)  Merchandise 
shipped  abroad  against  which  drafts  are  drawn  and  sold  in 
the  exchange  market;  (2)  securities  sold,  the  seller  drawing 
on  the  buyer;  (8)  foreign  money  loaned  in  this  market,  the 
operation  consisting  of  drawing  drafts  on  the  lender;  (4) 
finance  bills,  arising  from  the  banker  abroad  allowing  a 
banker  here  to  draw  on  him,  the  drafts  being  sold  and  pro- 
ceeds used  in  financial  transactions  until  the  draft  is  due.1 

lEscher,  "Elements  of  Foreign  Exchange." 


572 


THE    PRACTICAL  WORK  OF   A   BANK 


Whenever  a  consignment  of  merchandise  goes  abroad,  as 
a  rule,  a  draft  is  drawn  on  the  buyer  by  the  seller,  and  sold 
in  the  market,  the  seller  coming  into  immediate  possession 


Guaranty Ttust  Company  of  Kwlbrk 


LETTEH  OF    CREDIT 


of  his  money.  The  trade  movements,  therefore,  regulate  the 
number  and  volume  of  these  bills,  since  they  are  as  volumi- 
nous as  commerce  is  brisk  or  dull.  When  ocean  transit  op- 
erations are  at  a  practical  standstill,  as  obtained  during  the 


FOREIGN    AND    DOMESTIC    EXCHANGE  578 

early  part  of  the  present  war,  no  bills  arise,  for  no  goods 
move,  and  rates  are,  therefore,  high. 

Large  stocks  of  bonds  and  securities  are  held  abroad,  the 
European  nations  being  large  investors  in  American  securi- 
ties. When  a  transaction  is  consummated,  the  securities  are 
forwarded  and  draft  attached.  And  the  movements  of  secu- 
rity holdings,  therefore,  affect  the  supply  of  bills. 

In  making  loans,  bankers  do  not  send  the  cash,  but  al- 
low their  correspondents  to  draw  on  them.  Thus,  if  an  Eng- 
lish bank  were  to  lend  a  million  dollars  in  this  market,  it 
would  authorize  its  representative  to  draw  on  it,  and  these 
drafts  are  sold  and  the  proceeds  used  as  agreed  upon.  Take 
an  actual  case.  A  wholesale  house  desires  a  loan,  say,  of 
$50,000.  It  deposits  with  its  New  York  banker  security  in 
the  form  of  its  bills  receivable,  and  the  banker  draws  his 
draft  on  the  English  house,  sells  it  and  turns  the  proceeds 
over  to  the  borrower.  When  rates  abroad  are  low,  this  may 
be  a  profitable  form  of  borrowing.  If  money  rates  are  high 
in  New  York,  the  foreign  bankers  may  allow  their  corr^ 
spondent  to  draw  on  them  for  money  to  loan  out  for  joint 
account,  and  this  gives  rise  to  what  is  called  "finance  bills.'* 


THE  DEMAND  FOR  BILLS 

The  demand  for  instruments  of  exchange  arises  from 
the  following  sources:  (a)  The  payment  for  imports;  (b) 
payment  for  securities  purchased  by  us  in  Europe;  (c)  re- 
mittances on  account  of  interest  and  dividends  on  stocks 
and  bonds  held  abroad;  (d)  remittances  for  freight  and  in- 
surance due  to  foreign  companies;  (e)  tourists'  expendi- 
tures; (f)  payment  for  short-time  and  other  loans  that  are 
maturing. 

The  most  important  item  is  the  payment  for  merchandise 
purchased  abroad.  As  each  shipment  is  paid  for  by  draw- 
ing a  bill  of  exchange,  these  instruments  come  into  the  mar- 
ket in  large  numbers  and  for  large  amounts,  and  are  a 
source  of  constant  supply  of  bills. 

As  interest  is  due  and  dividends  are  declared,  holders 
abroad  must  be  placed  in  funds,  and,  therefore,  a  demand 
arises  for  a  bill  for  the  purpose  of  remitting.  Likewise  pur- 
chases of  securities.  Whenever  these  are  purchased  abroad, 


674  THE   PRACTICAL  WORK  OF   A  BANK 

whether  our  own  or  foreign  issues,  a  demand  arises  for  a 
bill  of  exchange  with  which  to  make  payment. 

Many  of  the  large  insurance  companies  are  foreign  cor- 
porations, doing  business  in  this  country  amounting  to  mil- 


Guaranty  Trust  Company  of  New  York 

Foreign  Department 


Gentlemen: 

We  hereby  ^authorize  you  to  value  on  (^uaranty  Trust  Compin^of^Xew  York,  Hew  York, 

for  aCCOUnt  Of //..t<L^'  *<i^.*^w:.?....  vv^..~  .r..w:.itr..r...» :^...^... •..  .•^w.'r:..!^ f  U.-..J  .!/. — j. — ,.^. -<••-* 

up  to  an  aggregate  amount  of ^^..^^^^..(^t^ ...  LfflrW*J.lblMJkd',j!^^ 

™*  / 


available  by  your  drafts 
against  shipment  of 


Bills  of  Lading  for  such  shipments"  must  b^jiade  out  to  the  order  of  the  Guaranty  Trust  Company 
of  New  York,  unless  otherwise  specified  fn  this  i 

CONSULAR  INVOICE  AND  ONE  BILlToF  l|ADING  MUST  BE  SENT  BY  THE  BANK  OR  BANKER  NEGOTIATING 
DRAFTS  DIRECT  TO  GUARANTY  TRUST  COMPfcWY  OF  NEW  YORK,  NEW  YORK 

The  remaining  documenjs^jnu^  accompany  the  drafts  drawn  on  Guaranty  Trust  Comcany  of  NPW  York, 
New  York. 

The  amount  of  ea^hN^^af^negotiated,  together  with  date  of  negotiation,  must  be  endorsed  on 
back  hereof. 

We  hereby  agree  ^rith  bona  fide  holders  that  all  drafts  drawn  by  virtue  of  this  Credit  and  in 
accordance  with  the  above  stipulated  terms  shall  meet  with  due  honor  upon  presentation  at  the  Office  of 
Guaranty  Trust  Company  of  New  York,  New  York,  if  drawn  and  negotiated  prior  to 


Guaranty  Trust  Company  of  New  York, 


N.  B.  Drafts  drawn  under  this  Credit  must  state 
that   they   are    "drawn,  under   Letter   of 

Credit  No.  _2_ftJ2 __._^. 

Dated -s^" 


ie*/.A-.n^ 


ADVICE    OF    l-ETTKH    Or    CREDIT 


lions  yearly.     The  premiums  must  be  remitted  to  the  home 
office,  and  hence  a  demand  for  bills  arises. 

FORMS  or  Buxs 

The  following  are  the  principal  forms  of  bills:  (a)  Com- 
mercial long  bills — bills  drawn  by  merchants  upon  buyers 
abroad,  through  bankers,  at  thirty,  sixty  or  ninety  days 


FOREIGN    AND    DOMESTIC    EXCHANGE  575 

sight.    If  drafts  accompany,  they  are  "documentary  bills"; 
if  not,  they  are  "clean." 

Thus,  a  cotton  merchant  in  Texas  sells  a  consignment  of 
cotton  to  a  Liverpool  merchant,  under  arrangement  that  the 
Texas  merchant  is  to  draw  on  a  Liverpool  hank  at  sixty 
days.  The  Texas  merchant  receives  a  bill  of  lading  from 
the  railroad  company  which  is  a  "through  bill,"  and  takes 
the  cotton  into  the  steamer.  Draft  is  drawn  and  the  bill  of 
lading  attached.  Insurance  is  also  effected  and  other  docu- 
ments, such  as  inspection  certificate,  weighing  certificate, 
etc.,  attached,  completing  the  papers.  The  draft  will  be 
taken  to  the  Texas  bank,  credited  to  the  depositor,  and  sent 
to  New  York  for  sale  in  the  exchange  market. 

Let  us  suppose  the  rate  is  4.86,  and  the  draft  is  for 
£1,000.  The  Texas  bank  will  have  credit  for  $4,860.  The 
New  York  bank  may  charge  a  commission  for  buying  the 
draft,  or  make  allowance  in  the  price;  but  it  gets  its  profit. 
The  bill  is  sent  by  the  first  steamer  to  the  bank  drawn  on 
for  acceptance.  If  the  documents  are  toxbe  released  upon 
acceptance,  such  will  be  the  case;  if  only  upon  payment,  the 
draft  will  have  to  be  paid  before  documents  are  delivered. 
As  soon  as  the  bill  is  accepted,  it  is  sold  and  proceeds 
credited  to  the  New  York  bank.  Thus,  we  have  an  "accept- 
ance bill,"  and  a  "payment  bill." 

(b)  Clean  bills — drawn  for  the  purpose  of  transferring 
funds  from  place  to  place  and  no  documents  accompany; 
(c)  drafts  drawn  against  securities,  the  securities  accom- 
panying; (d)  bankers'  checks,  which  are  merely  bankers' 
orders  on  their  foreign  balances,  as  domestic  exchange  is  the 
result  of  bankers'  checks  on  their  reserve  balances;  (e) 
finance  bills,  used  in  lending  and  borrowing  operations. 

How  EXCHANGE  is  QUOTED 

Foreign  exchange  is  drawn  on  three  principal  points: 
London,  Paris  and  Berlin.  Drafts  on  London  are  quoted 
at  so  much  a  pound  Sterling,  and  progress  by  5/100  of  a 
cent  a  pound.  Thus,  $4.8605;  $4.8610.  Drafts  on  Berlin 
are  quoted  at  so  many  American  cents  for  each  four  marks. 
Thus,  95  1/8  means  that  95  1/8  cents  must  be  paid  for  four 
marks.  These  quotations  progress  by  sixteenths.  Thus, 
95,  95  1/16,  95  1/8,  95  3/16,  etc.  The  custom  is  fixed,  but 


076  THE   PRACTICAL  WORK  OF   A   BANK 

it  would  seem  to  be  more  reasonable  to  quote  a  mark  at  so 
many  American  cents;  but  the  above  process  is  the  rule. 

Drafts  on  Paris  are  quoted  at  so  much  French  money 
for  an  American  dollar.  Thus,  5.18  1/8  means  that  that 
many  francs  may  be  bought  with  an  American  dollar. 
These  quotations  progress  by  5/8  of  a  centime,  thus: 
5.18  1/8,  5.18  3/4,  etc.  Thus,  when  exchange  on  Paris  is 
high  a  dollar  will  buy  less  francs,  and  when  cheap,  more.* 

THE  BASIS  OF  EXCHANGE 

The  basis  of  exchange  dealings  is  the  mint  par  of  ex- 
change, which  is  the  price  of  the  gold  unit  of  one  country 
expressed  in  money  of  the  other.  Thus,  the  gold  unit  of 
England  is  the  pound  Sterling.  How  much  is  the  gold  in 
the  pound  Sterling  as  expressed  in  American  money? 
$4.8665 — meaning  that  the  latter  amount  of  dollars  and 
cents  will  buy  at  any  United  States  assay  office  exactly  as 
much  gold  as  there  is  in  the  pound  Sterling.  And  $4.8665 
is  the  mint  par  of  exchange  between  this  country  and 
England. 

This  does  not  mean,  however,  that  drafts  are  always  sold 
at  this  rate,  for  many  elements  enter  to  affect  the  price  of 
exchange.  Thus,  if  a  debt  of  one  pound  were  due  in  Lon- 
don, it  would  cost  $4.8665  to  buy  the  gold  to  settle.  Then 
it  would  have  to  be  shipped,  insured,  interest  lost  while  in 
transit,  etc.,  so  that  you  might  be  willing  to  pay  more  than 
that  in  order  to  avoid  the  shipping  of  the  gold.  You  would 
pay,  in  other  words,  more  than  the  mint  par  to  someone  who 
had  an  order  on  some  London  merchant  for  sale.  You  buy 
the  order,  send  it  to  your  creditor,  he  presents  it  and  gets 
the  money  and  the  transaction  is  closed. 

If  there  were  many  who  wanted  to  settle  debts  in  Lon- 
don, they  might  bid  for  the  bill  and  run  the  price  up;  if 
there  were  many  bills,  but  few  takers,  the  price  would  fall, 
the  law  of  supply  and  demand  regulating  the  price  at  which 
they  can  be  bought  and  sold. 

CAUSES  THAT  AFFECT  EXCHANGE  RATES 

The  causes  operating  to  raise  or  lower  rates  are  due  to 
the  following:  (a)  Large  imports  or  exports  which  require 

*In  recent  years  exchange  on  Paris  and  London  is  quoted  in  cents,  as  well  as 
by  the  rule  above  given. 


FOREIGN    AND    DOMESTIC    EXCHANGE  577 

bills  to  make  payment;  (b)  purchase  by  us,  and  sale  by 
Europe,  or  vice  versa,  of  stocks  and  bonds,  which  must  be 
paid  for;  (c)  maturing  obligations  which  must  be  met;  (d) 
low  money  rates  here  and  high  abroad,  or  vice  versa,  mak- 
ing a  demand  for  bills  by  which  to  send  funds  for  invest- 
ment. 

Aside  from  business  obligations  which  must  be  settled, 
there  is  always  investment  funds  seeking  profitable  employ- 
ment. When  money  is  low  in  New  York  and  a  drug  on  the 
market,  and  demand  is  brisk  in  London,  banks  here  will  have 
a  call  for  exchange  in  order  to  place  the  funds  abroad;  and 
conversely  if  money  rates  are  high  here  and  low  abroad,  for- 
eign interests  will  desire  to  place  money  in  this  market  and 
a  demand  for  bills  will  arise. 

But  whatever  the  cause,  the  bill  finds  its  way  into  the  ex- 
change market  and  is  bought  by  a  bank  or  trust  company 
through  the  foreign  exchange  department,  and  a  simple 
illustration  will  suffice  to  show  the  operation  of  an  importa- 
tion of  goods. 

IMPORTS 

Inasmuch  as  every  shipment  of  merchandise  in  or  out 
of  the  country  involves  a  transaction  in  foreign  exchange, 
the  commercial  credits  thus  arising  are  important.  These 
credits  are  of  two  kinds:  credits  for  import  purposes  and 
credits  for  export  purposes. 

Let  us  assume  that  a  merchant  in  New  York  dealing  in 
Japanese  ware  has  arranged  a  purchase  with  a  merchant  in 
Japan,  either  by  cable,  by  mail,  or  by  representative.  Hav- 
ing made  the  arrangements  as  to  terms,  the  merchant  goes 
to  his  banker  and  arranges  to  finance  the  operation.  He 
places  full  details  before  the  banker,  who  issues  a  letter  of 
credit.  The  letter  of  credit  will  contain  information  as  to 
terms,  time  to  run,  articles  to  be  shipped,  insurance,  etc.,  and 
will  authorize  the  shipper  to  draw  on  some  London  bank 
which  will  accept  the  draft  when  presented. 

Inasmuch  as  the  business  of  financing  the  foreign  trade 
of  the  world  is  largely  done  through  London,  the  credit  will 
be  arranged  through  a  London  bank.  This  business  is  the 
outgrowth  of  years  of  world-wide  dealings  and  London 
banks  are  known  the  world  over.  They  have  established 
reputations  and  banking  connections  in  every  part  of  the 

38 


578  THE    PRACTICAL   WORK   OF   A   BANK 

globe.  London  is  not  only  the  money  center  of  the  world, 
but  the  world's  great  trading  center.  To  it  comes  trade 
from  all  the  world,  and  by  virtue  of  its  place  in  the  world's 
financial  affairs,  London  has  become  the  clearing-house  for 
the  world's  transactions,  and  a  London  acceptance  will  be 
good  anywhere. 

The  merchant  in  New  York,  therefore,  arranges  with 
his  bank  for  a  London  acceptance,  giving  security  or  not, 


TRUST   RECEIPT. 


Received  from  THE  GUARANTY  TRUST  Co.  OF  NEW  YORK  the  following  goods 

and  merchandise,  their  property,  specified  in  the  Bill  of  Lading  per  S.  S 

Dated  marked  and  numbered  as  follow*: 


f     I     1  x 

and,  in  consideration  thereof,  |  — =—  f  HEREBY  AGREE  TO  HOLD  SAID  GOODS  IN  TRUST  for 

them,  and  as  their  property,  with  liberty  to  sell  the  same  for  their  account,  and  further 
agree,  in  case  of  sale  to  hand  the  proceeds  to  them  to  apply  against  the  acceptances  of 

THE  GUARANTY  TRUST  Co.  OF  NEW  YORK  on  j  -^- 1  account  under  the  terms  of  the 

Letter  of  Credit  No issued  for  \-^r  \  account  and  for  the  payment  of  any 

other  indebtedness  of  {  ™^  J  to  THE  GUARANTY  TRUST  Co.  OF  NEW  YORK. 

THE  GUARANTY  TRUST  Co.  OF  NEW  YORK  may  at  any  time  cancel  this  trust  and  take 
possession  of  said  goods,  or  of  the  proceeds  of  such  of  the  same  as  may  then  have  been  sold, 
wherever  the  said  goods  or  proceeds  may  then  be  found  and  in  the  event  of  any  suspension, 

or  failure,  or  assignment  for  the  benefit  of  creditors,  on  [  -^j-  f  part,  or  of  the  non-fulfill- 
ment of  any  obligation,  or  of  the  non-payment  at  maturity  of  any  acceptance  made  by 
{ ~1T~  1  under  said  credit,  "f  ""der  «ny  other  credit  issued  by  THE  GUARANTY  TRUST  Co. 
OF  NEW  YORK  on  {  -"£••  }  account  or  of  any  indebtedness  on  { -^-  j  part  to  them,  all 
obligations,  acceptances,  indebtedness  and  liabilities  whatsoever  shall  thereupon  (with  or 
without  notice)  mature  and  become  due  and  payable.  The  said  goods  while  in  -j  ^  j- 
hands  shall  be  fully  insured  against  loss  by  fire. 


Dated,  New  York  City,. 

(Signed) 
__._  Stg. 


TRUST    RECEIPT 


FOREIGN    AND    DOMESTIC    EXCHANGE  579 

as  his  credit  may  require.  The  London  bank  will  be  ad- 
vised of  the  open  credit,  and  the  letter  of  credit  will  be  sent 
to  the  Japanese  merchant  as  authority  to  draw  on  the  Lon- 
don bank.  The  shipper  draws  the  draft,  attaches  insurance 
certificate  and  bill  of  lading,  which  is  so  worded  as  to  make 
the  merchandise*  deliverable  only  to  the  banker's  order  in 
New  York.  This  is  his  protection.  The  letter  of  credit  is 
sent  in  duplicate  to  the  London  bank  for  its  guidance  when 
the  draft  is  presented. 

The  draft  with  bill  of  lading,  certificates,  etc.,  attached 
form  one  complete  set  of  papers.  The  Japanese  merchant 
is  now  in  position  to  sell  his  draft,  for  it  will  be  accepted  in 
London,  and  his  local  bank  will  buy  it  from  him  at  current 
rates. 

The  merchandise  is  en  route  to  New  York,  and  the 
papers  on  their  way  to  London.  When  the  papers  are  pre- 
sented to  the  London  bank  they  will  be  compared  with  the 
duplicates  sent  in  advance  from  New  York,  and  if  proper 
in  form,  the  draft  will  be  accepted  and  returned  to  the  pre- 
senting bank,  which  will  sell  it  in  the  money  market,  and 
credit  proceeds  to  its  Japan  correspondent.  The  papers 
in  the  transaction  are  then  forwarded  to  New  York,  arriv- 
ing before  the  merchandise,  as  a  rule. 

The  goods  arriving  in  New  York  are  at  the  disposal  of 
the  merchant,  but  stand  in  the  name  of  the  bank  and  can- 
not be  had  until  the  bill  of  lading  is  presented,  properly 
endorsed,  to  the  carrier.  The  banker,  however,  wants  some 
assurance  of  getting  the  money  he  will  have  to  advance  to 
London  to  meet  the  acceptance  when  due,  as  agreed  when 
the  credit  was  opened. 

He,  therefore,  surrenders  the  bill  of  lading,  and  in  its 
place  takes  a  "trust  receipt,"  which  in  substance  agrees  that 
the  title  to  the  goods  is  to  remain  in  the  bank,  and  proceeds 
when  collected  are  to  be  delivered  to  the  bank.  The  bank 
also  reserves  the  right  upon  due  cause  to  cancel  the  trust, 
and  take  possession  of  the  goods  or  their  proceeds  wherever 
they  may  be  found. 

The  term  of  credit  being  about  to  expire,  it  becomes 
needful  that  the  bank  in  New  York  be  placed  in  funds  to 
meet  the  acceptance  which  is  coming  due  in  London.  Sev- 
eral days  prior  to  the  maturity  of  the  acceptance,  the  New 
York  bank  will  present  its  memorandum  to  the  buyer,  with 


580  THE   PRACTICAL  WORK   OF   A   BANK 

request  for  funds  to  meet  the  London  acceptance;  and  pre- 
suming the  terms  to  have  been  four  months,  the  buyer  has 
had  that  time  in  which  to  turn  the  goods  into  money. 

The  buyer  pays  the  banker  the  amount  necessary  to  pur- 
chase a  draft  on  London,  and  from  the  amount  so  received 
the  bank  will  buy  a  draft  on  London  payable  on  demand, 
and  forward  to  London  in  time  to  meet  the  acceptance.  The 
operation  is  then  closed.  No  money  has  been  put  up  ex- 
cept in  the  London  money  market.  The  bank  in  New  York 
advanced  none ;  the  buyer  had  four  months  to  turn  his  sales ; 
from  the  sales  he  paid  the  bank,  and  from  the  amount  so 
paid,  the  bank  purchased  an  instrument  to  cancel  the  debt 
due  in  London;  and  so  without  money,  but  using  only  credit 
and  banking  machinery,  an  international  transaction  has 
been  carried  through.  The  New  York  bank  received  a  com- 
mission for  its  services ;  the  London  bank  for  its  acceptance, 
and  the  transaction  is  satisfactory  to  all. 

The  purchaser  gets  his  money  from  the  sale  of  goods; 
the  banker  gets  his  money  from  the  buyer  here;  the  Lon- 
don bank  from  the  New  York  banker;  but  where  does  the 
money  come  from  for  the  seller?  From  his  bank.  But 
where  does  that  bank  get  its  funds?  It  does  not  get  funds, 
but  a  credit  in  London,  against  which  it  sells  its  bankers' 
draft. 

When  the  draft  went  to  London,  the  proceeds  were 
credited  to  the  Japanese  bank,  and  against  the  credit  so  es- 
tablished, it  could  draw  its  bankers'  time  or  demand  drafts, 
for  cash  deposited  with  it.  The  only  one  actually  out  of 
funds  during  the  period  of  credit  was  the  bank  or  individual 
buying  the  draft  in  London,  the  proceeds  of  which  were 
placed  to  the  credit  of  the  bank  in  Japan.  These  are  the 
essential  elements  of  foreign  exchange,  elementary  and  eas- 
ily understood,  but  complex  and  often  confusing  in  their 
detailed  operations. 

EXPOETS 

In  selling  a  consignment  of  goods  abroad  the  reverse 
process  obtains,  as  was  illustrated  in  the  case  of  the  Texas 
merchant  above.  The  buyer  here  draws  on  London  and  sells 
the  draft  to  an  American  bank,  which  will  forward  as  did 
the  Japanese  bank  to  London  for  acceptance.  In  exports  it 
is  necessary  to  have  the  documents  complete  so  that  the  bill 


FOREIGN    AND    DOMESTIC    EXCHANGE  581 

will  be  accepted  upon  arrival.  These  are:  (a)  The  bill 
itself,  properly  drawn  in  duplicate;  (b)  the  bill  of  lading, 
sometimes  issued  at  the  place  of  origin  and  which  carries  the 
consignment  through  from  the  railroad  to  the  steamer  and 
to  the  foreign  port;  (c)  the  insurance  papers;  and  if  grain 
or  cotton  (d)  an  inspection  certificate.  With  these  in  hand 
the  bill  is  readily  salable  in  the  foreign  exchange  market  at 
the  current  rates. 

For  a  foreign  exchange  transaction,  it  becomes  impor- 
tant to  know:  (a)  That  the  bill  of  lading  is  genuine  and 
the  goods  in  transit:  and  this  is  now  assured  by  virtue  of 
the  frauds  that  have  been  perpetrated  in  this  line,  and  from 
which  have  resulted  better  and  more  careful  methods  as  to 
safeguarding  the  issue  of  bills  of  lading;  (b)  that  the 
drawee  is  responsible  and  will  accept  when  the  papers  are 
presented,  and  that  this  acceptance  will  be  equivalent  to  pay- 
ment; (c)  the  class  of  goods.  If  they  are  staple,  they  may 
be  sold  even  though  the  transaction  is  not  consummated; 
but  if  otherwise  trouble  may  be  experienced  in  turning  the 
goods  into  money;  and  lastly,  the  character  of  the  bill  of  ex- 
change— whether  it  is  one  that  releases  the  documents  upon 
acceptance  or  only  upon  payment. 


There  are  many  factors  to  be  considered  in  buying  ex- 
change. Not  only  does  the  quoted  rates  indicate  the  mar- 
ket, but  the  time  of  the  bill  and  the  character  have  much  to 
do  with  the  rate.  If  the  draft  is  drawn  for  a  long  time — 
thirty,  sixty  or  ninety  days — the  acceptor,  upon  paying  the 
draft  before  maturity,  is  entitled  to  a  rebate  for  the  unex- 
pired  term.  This  rate  of  discount  varies  according  to  the 
official  rate  of  the  Government  banks.  In  England  a  "pay- 
ment bill"  is  rebated  at  one-half  per  cent,  above  the  adver- 
tised rate  of  interest  paid  by  the  joint  stock  banks  on  short- 
time  deposits.  If  the  rate  is  three  and  one-half  per  cent,  the 
rebate  rate  will  be  four  per  cent,  on  English  payment  bills. 
There  are  also  the  taxes  and  other  bank  charges. 

Bills  are  usually  drawn  in  sets  of  two  and  sometimes 
three.  The  reason  for  this  came  about  through  the  perils  of 
the  sea.  When  in  olden  days  a  bill  was  drawn,  it  was  drawn 
in  duplicate  or  triplicate,  and  each  one  sent  by  a  different 


582  THE    PRACTICAL   WORK  OF   A   BANK 

vessel,  so  that  in  the  event  of  disaster  all  would  not  be  lost. 
This  practice  still  obtains.  Thus,  in  the  loss  of  the  Titanic 
but  few  if  any  bills  were  eventually  lost,  there  having  gone 


TRUST   RECEIPT 


(DOCUMENTS   FOR  WAREHOUSING) 


Kmtor ft  from  THE  GUARANTY  TRUST  Co.  OF  NEW  YORK  Bill  of  Lading  per — 

dated —  for  the  following  goods  and  merchandise, 

their  property,  marked  and  numbered  as  follows : 


imported  under  the  terms  of  Letter  of  Credit  No ,  issued  by  them  for  j  -"^  £  account, 

the  said  Bill  of  Lading  to  be  used  by  | -jjj-j  for  the  sole  purpose  of  entering  the  above 

described  property  at  the  United  States  Custom  House  at  the  Port  of  — .  , 

and  of  storing  the  same  in  the  name,  and  as  the  property,  of  the  said  THE  GUARANTY  TRUST 
CO.  OF  NEW  YORK,  and  subject  only  to  their  order,  j  —  |  hereby  agreeing  to  so  store 
the  said  property  and  to  hand  the  storage  receipt  for  the  same  to  the  said  THE  GUARANTY 
TRUST  Co.  OF  NEW  YORK,  when  obtained. 

j  ^g- 1  ALSO  AGREE  to  fully  insure  said  property  against  fire,  the  loss,  if  any,  payable 
to  said  THE  GUARANTY  TRUST  Co.  OF  NEW  YORK,  and  to  hand  to  them  the  policies  of 
insurance  thereon. 

Dated 191 

(Signed) -  — 


THTTST   HECEIPT — DOCUMENTS    FOR    WAHEIIOtrSIXO 

by  other  steamers  duplicates  of  those  aboard  the  ill-fated 
vessel. 

It  would  be  futile  in  so  brief  a  review  of  foreign  ex- 
change to  attempt  to  work  out  problems  to  show  the  profits 


FOREIGN    AND    DOMESTIC    EXCHANGE  588 

or  the  various  calculations  in  the  exchange  operations ;  suffi- 
cient here  to  give  the  fundamental  principles. 

The  greatest  danger  in  handling  foreign  exchange,  as 
well  as  any  loan  secured  by  merchandise  in  transit,  is  the 
forged  bill  of  lading,  and  all  that  has  been  said  regarding 
the  authenticity  of  these  documents  elsewhere  here  applies; 
for  if  the  bill  of  lading  be  a  forgery  (and  such  are  easy  to 
obtain)  the  security  rests  entirely  upon  the  drawe'r's  credit, 
and  if  the  bill  is  forged  it  is  more  than  likely  that  the  trans- 
action is  bogus. 

A  finance  bill  has  been  defined  as  "a  long  draft  drawn 
by  a  banker  in  one  country  on  a  banker  in  another,  some- 
times secured  by  collateral,  but  more  often  not,  and  issued 
by  the  drawing  banker  for  the  purpose  of  raising  money."2 
The  origin  of  these  finance  bills  is  an  agreement  made  be- 
tween two  bankers  by  which  one  agrees  to  allow  the  other 
to  draw  on  him  up  to  a  certain  amount,  and  to  accept  the 
bills  as  presented,  for  a  commission.  The  drawer's  credit 
must,  of  course,  be  good  with  the  accepting  bank,  or  collat- 
eral deposited,  which  would  defeat  the  purpose  of  the  ar- 
rangement, i.  e.,  the  raising  of  money  on  mere  credit. 

If  the  drawing  banker  can  sell  his  drafts  at  a  high  figure 
and  when  the  acceptance  is  due,  pay  by  buying  a  demand 
draft  at  a  cheaper  rate,  he  has  made  a  double  profit;  but  if 
the  market  is  higher,  he  will  lose  part  of  his  profits  made  by 
lending  the  proceeds  of  the  first  draft.  It  is  a  speculation 
in  exchange. 

There  is  a  vast  amount  of  foreign  money  loaned  out  in 
this  market.  Interest  rates  here  are  usually  higher  than 
abroad,  where  capital  has  accumulated  for  centuries,  and 
where  there  is  usually  a  surplus,  it  being  estimated  that 
before  the  war  France  invested  yearly  nearly  a  billion  dollars 
in  outside  securities. 

Suppose  a  foreign  banker  decides  to  loan  in  this  market. 
He  may  go  "joint  account"  with  an  American  bank,  or  loan 
independently  through  the  latter.  The  loan  is  negotiated 
with  the  borrower  and  the  banker  will  draw  a  draft  for  the 
amount  to  be  loaned,  say,  £10.000,  and  hand  to  the  bor- 
rower who  will  sell  it  in  the  market.  When  payment  is  due 
in  London,  the  borrower  must  have  in  hand  a  demand  bill 

aEscher,  "Elements  of  Foreign  Exchange." 


684  THE   PRACTICAL  WORK  OF   A   BANK 

for  the  amount  due.  To  illustrate:  Suppose  a  London 
bank  arranges  to  loan  in  New  York  ,£100,000.  The  New 
York  bank  draws  a  £100,000  bill  at  ninety  days'  sight,  and 
turns  over  to  a  brokerage  house,  which  has  deposited  sat- 
isfactory security.  The  firm  sells  the  draft  for  $485,000. 
The  bill  goes  to  London  and  is  accepted  by  the  London 
bank,  and  sold  in  the  market.  In  ninety  days  the  bill  will 
be  due,  arid  the  New  York  bank  will  ask  the  borrower  to 
send  a  demand  draft  for  the  £100,000  plus  a  commission. 
This  bill  will  arrive  in  London  a  few  days  before  the  first 
draft  is  due  and  take  it  up. 

The  profits  depend  upon  the  state  of  the  market.  In 
the  first  place,  upon  the  amount  the  borrower  realized  from 
the  sale  of  the  first  draft;  in  the  second  place,  what  the  de- 
mand draft  cost,  and  in  the  third,  the  commissions.  If  ex- 
change was  high  when  the  loan  was  made  and  low  when  it 
matured,  the  borrower  has  profited;  if  low  when  the  loan 
was  made  and  high  when  it  matured,  he  has  lost. 

If  the  loan  had  been  for  dollars,  the  bank  would  have 
turned  over  the  proceeds  of  the  draft  first  drawn,  and  not 
the  draft  itself.  At  the  end  of  the  time  the  firm  would  pay 
the  loan  in  dollars  plus  interest  and  commissions,  and  the 
bank  would  invest  the  proceeds  in  a  draft  to  be  sent  over  to 
pay  the  loan  when  due.  It  is  evident  that  the  lender  puts 
up  no  money,  but  simply  allows  his  credit  to  be  drawn 
against.  The  loan  money  will  come  from  the  open  market, 
and  at  maturity  the  loan  will  be  paid  by  the  borrower  on  this 
side,  and  the  banker  has  made  a  distinct  profit  from  the  use 
of  his  credit.  The  London  bank  must,  of  course,  be  in  posi- 
tion to  meet  its  acceptance.  The  profit  to  both  banks  con- 
cerned in  the  loan  is  the  commission  for  the  services. 

PROFITS  IN  FOREIGN  EXCHANGE 

After  the  banker  has  ascertained  what  the  rate  of  dis- 
count will  be  for  bills  due  to  arrive  by  a  certain  steamer,  he 
is -in  position  to  buy  bills  here  and  send  them  over  for  dis- 
count and  credit.  On  the  balance  thus  created,  he  will  draw 
his  banker's  drafts.  If  from  selling  his  demand  drafts  he 
realizes  more  than  the  time  drafts  cost  him,  he  is  that  much 
the  gainer.  To  illustrate:  A  banker  has  bought,  say,  a 
£1,000  ninety  days'  sight  prime  draft  on  London,  docu- 
ments deliverable  on  acceptance.  This  he  has  remitted  to 


FOREIGN    AND    DOMESTIC    EXCHANGE  686 

his  foreign  correspondent,  and  the  latter  has  had  it  stamped 
with  the  required  "bill  stamp,"  had  it  discounted,  and  after 
having  taken  commissions  out  of  the  proceeds,  has  placed 
them  to  the  credit  of  the  American  bank.  In  this  process 
the  bill  has  lost  weight.  It  arrived  in  London  as  ,£1,000, 
but  after  commissions,  bill  stamp  and  ninety  days'  discount 
have  been  deducted,  the  amount  is  reduced  well  below 
£1,000.  The  net  proceeds  which  go  to  make  up  the  balance 
on  which  the  American  banker  can  draw  his  drafts  are  per- 
haps not  over  £990.  He  paid  so  many  dollars  originally 
for  the  draft.  If  he  can  realize  that  many  dollars  by  selling 
his  demand  drafts,  he  is  even  on  the  transaction;  if  more,  it 
is  to  his  profit;  if  less,  he  loses.3 

ARBITRAGE 

Arbitrage  is  the  dealing  in  foreign  exchange  through  a 
third  city  rather  than  direct.  For  instance:  A  banker  in 
New  York  desires  to  make  a  remittance  to  Paris.  He  finds 
that  he  can  remit  from  London  cheaper  than  direct  from 
New  York.  He  draws  his  draft  on  Paris  and  sells  it.  With 
the  proceeds  he  buys  a  draft  on  London.  He  instructs  his 
London  banker  to  buy  a  draft  on  Paris  for  him  and  send 
it  for  his  account.  If  the  market  is  favorable  for  such  an 
operation  there  may  be  a  distinct  profit  over  remitting  di- 
rect. It  can  readily  be  understood  that  such  operations  re- 
quire a  keen  insight  into  the  market  and  careful  calculations 
so  that  profit  results,  and  all  sorts  of  combinations  are  pos- 
sible. But  banks  as  banks  do  not  deal  in  such  matters  ex- 
tensively, it  being  the  function  of  specialists  in  foreign  ex- 
change to  carry  through  such  operations.  The  average 
banker  simply  buys  and  sells  drafts  on  balances  abroad, 
either  directly  or  indirectly,  but  most  generally  the  latter, 
through  large  city  banks. 

CABLES 

A  cable  transfer  is  essentially  the  same  as  a  telegraphic 
transfer  of  money.  The  banker  on  this  side,  upon  receipt 
of  the  money,  will  cable  the  bank  abroad  to  pay  a  certain 
amount  to  the  party  designated.  This  necessitates,  of  course, 

*Escher,  "Elements  of  Foreign  Exchange." 


586 


THE    PRACTICAL  WORK  OF   A   BANK 


Guaranty  Trust  Company  of  New  York 

FOREIGN  DEPARTMENT 


COLLECTIONS 


No. 


Date 


Orig.  No. 


For  account  of 


Payable  in 


Amount 


Issued 


Term 


Accepted 


Due 


Drawer 

Drawee 

Acceptance  and  return  to  fgn. 


Documents  on  acceptance 


Documents  on  payment 


Bills  of  lading 


Consular  invoice 


Invoice 


Insurance  certificate 


Certificate  of  inspection 


Declaration  of  shipper 


No  protest 


No  protest  for  non-acceptance 


Hold  for  arrival  of  goods 


Posted  owner's  book 


Rate 
Exchange 


COLLECTIONS,    FOREIGN    EXCHANGE   TRANSACTIONS 


carrying  a  balance  abroad,  as  the  transfer  of  money  by 
telegraph  necessitates  a  supply  of  cash  by  the  one  advised 
to  pay  on  the  other  end. 

The  foreign  exchange  market  has  no  clearing-house — no 
"Exchange" — the  market  being  very  broad  and  "open."  It 
is  composed  of  banks  and  exchange  houses  operating  inde- 
pendently, and  all  working  as  separate  units. 

There  being  no  exchange  and  no  public  place  where  of- 
ferings are  made  and  accepted,  the  market  is  established  by 
the  money  rates  abroad  and  the  demand  and  supply  of  bills. 


FOREIGN    AND    DOMESTIC    EXCHANGE  587 

Travellers'  letters  of  credit  are  documents  issued  by 
banks  and  foreign  exchange  houses  in  which  it  is  agreed  that 
the  issuing  bank  will  pay  up  to  a  certain  amount,  and  au- 
thorizing foreign  correspondents  to  make  advances  on  the 
letter  as  the  owner  requires.  As  the  journey  progresses, 
bank  after  bank  will  advance  various  amounts,  endorsing 
the  fact  on  the  back,  until  the  credit  is  exhausted.  As  ad- 
vances are  made  the  issuing  bank  is  notified  and  remits  its 
banker's  draft  or  settles  by  reciprocal  account. 

DOMESTIC  EXCHANGE 

One  of  the  profitable  functions  of  a  bank  is  to  furnish 
exchange,  both  foreign  and  domestic.  By  this  is  meant  the 
furnishing  of  drafts  and  letters  of  credit  on  other  points,  for- 
eign and  domestic.  Domestic  exchange  is  exceedingly  sim- 
ple, the  unit  being  the  dollar,  and  computations  in  other 
forms  of  money  are,  therefore,  not  necessary.  It  is  not  an 
arithmetical  process. 

The  bank  maintains  an  account  in  New  York,  Chicago 
or  other  large  city.  It  will  sell  its  orders  on  these  places  at 
a  certain  rate  of  exchange.  As  individuals  keep  bank  ac- 
counts, so  banks  keep  accounts;  and  as  the  individual  might 
ask  a  fee  for  drawing  a  check,  so  the  bank  charges  a  fee.  It 
is  cheaper  than  to  ship  the  money  by  express  and  the  ex- 
change rate  is  based  theoretically  on  the  cost  of  shipping 
money.  If  the  rate  is  greater  than  the  actual  express  cost, 
of  course  the  latter  method  would  be  used;  but  if  less,  the 
banker's  check  will  be  used. 

By  virtue  of  the  fact  that  checks  on  certain  cities  are  re- 
ceived at  par,  it  is  desirable  that  merchants  remit  in  such 
funds  as  a  courtesy  to  their  creditors,  and  is  a  right  which 
the  latter  may  insist  upon.  And  as  a  personal  check  would 
cost  the  creditor  the  collection  charges,  therefore,  the  draft 
is  not  only  just,  but  cheapest  and  is  often  requested.  Not 
only  are  these  drafts  sold,  but  are  used  to  settle  debts,  bank 
to  bank.  They  are  merely  checks  of  one  bank  drawn  on  an- 
other. 

Some  banks  as  a  courtesy  to  large  depositors  give  out 
these  domestic  drafts  without  charge.  For  instance:  A 
large  firm  will  have  several  out-of-town  bills  to  settle.  It 
will  draw  a  check  on  its  bank  to  cover  the  lot  and  send  to 


2 

O 


Q 

CO 


PC 
Q 


I 


FOREIGN    AND    DOMESTIC    EXCHANGE  589 

the  latter  with  notation  on  the  back  to  whose  order  drafts 
are  to  be  drawn.  The  bank  will  draw  several  drafts  in  the 
various  amounts  in  return  for  the  one  check,  which  the  mer- 
chant will  send  with  his  remittance  letters.  The  cost  to  him 
is  nothing,  but  to  the  bank,  theoretically,  the  cost  is  the  ex- 
pense of  placing  funds  in  the  New  York  bank  to  meet  the 
drafts ;  but  as  these  funds  are  created  by  sending  other  items 
drawn  on  New  York,  this  cost  is  small. 

Some  banks  use  a  draft  book  similar  to  the  ordinary 
check  book  with  stubs;  while  others  have  the  drafts  made  in 
pads,  numbered,  and  account  is  kept  of  drafts  issued  on  a 
"draft  register,"  giving  the  name,  date,  amount,  and  draft 
number. 

The  receiving  teller  taking  in  cash  for  a  draft  will  make 
out  a  requisition  for  draft,  and  the  paying  teller  exchanging 
a  draft  for  the  maker's  check,  will  make  a  like  requisition, 
in  order  to  balance  his  accounts  at  the  end  of  the  day. 

The  total  drafts  issued  each  day  are  credited  to  the 
banks  drawn  on,  by  passing  credit  tickets  taken  from  the 
register  in  total  for  each  bank.  Exchange  collected  from 
this  process  is,  of  course,  credited  to  exchange  account.  The 
accounts  are  reconciled  as  are  the  individual  accounts  of  a 
bank  with  its  own  customers.  Some  banks  notify  the  cor- 
respondent of  all  drafts  drawn,  and  others  of  those  over  a 
certain  amount.  One  bank  in  New  York  at  one  time  fea- 
tured the  opening  of  accounts  upon  which  drafts  could  be 
drawn  only  in  sums  of  $200  and  less,  the  agreement  being 
that  larger  drafts  would  not  be  drawn,  nor  would  such  be 
honored  without  communicating  with  the  drawer.  It  was 
a  clever  safeguard  against  possible  forgeries. 
il  r  i  ,  » 


APPENDIX  A 

(Supplement  to  Fifth  Edition) 

ACCRUED  INTEREST  A^JD  UNEARNED  DISCOUNT 

A  Simplified  Method 

It  is  a  recognized  principle  of  accounting  that  income 
which  is  constantly  accumulating  must  be  considered  an  as- 
set when  the  books  are  closed  for  the  purpose  of  making  up 
a  periodic  statement;  and,  on  the  other  hand,  a  charge 
against  the  operations  which  is  constantly  growing  must  be 
considered  a  liability.  If  these  two  factors  are  disregarded 
we  do  not  show  our  true  resources;  neither  do  we  show  our 
real  debts,  and  deceive  ourselves  in  both  instances. 

The  element  of  accrued  interest  has  taken  a  prominent 
place  in  banking  circles  during  the  past  two  years,  due  to 
the  Liberty  Loans  and  the  fact  that  the  Comptroller  of  the 
Currency  has  recently  asked,  for  the  first  time,  that  National 
Banks  report  their  true  condition  in  the  future,  which  con- 
dition can  only  be  stated  by  showing  interest  accrued,  debit 
and  credit,  together  with  the  unearned  discount,  to  be  men- 
tioned presently. 

The  time  bankers  have  taken  during  the  Liberty  Loan 
transactions  to  explain  why  accrued  interest  was  required 
from  the  subscriber  when  he  was  handed  his  bond,  would  run 
into  large  figures;  and  it  has  been  a  wholesome  lesson  to  the 
banking  public.  The  proposition  is  so  simple  to  the  banker 
and  bond  buyer,  that  it  seems  unnecessary  to  explain  in  de- 
tail a  hundred  times  a  day;  and  yet  we  find  many  otherwise 
intelligent  people  wholly  at  sea  in  such  matters. 

Many  bankers  have  never  fully  appreciated  the  import- 
ance of  accrued  interest  in  the  conduct  of  their  bank,  nor 
could  they  give  a  clear  reason  why  it  should  be  stated.  Let 
us  for  a  moment  see  the  underlying  principle.  The  best  defi- 
nition of  interest  yet  given  is:  "the  increase  in  a  debt  due 
to  the  lapse  of  time."  It  mav  be  the  "price  paid  for  the  use 
of  money,"  but  in  the  last  analvsis  the  first  definition  is  more 
accurate.  To  illustrate:  On  January  1st  you  purchase  at 


APPENDIX  A  591 

par  a  $1,000  New  York  State  four  per  cent,  bond,  interest 
payable  January  and  July  first.  Twenty  dollars  in  interest 
will  be  due  on  July  1st.  But  on  April  first  there  is  just  as 
truly  $10  due  as  if  it  were  so  stated  in  the  bond.  The  trouble 
lies  in  the  fact  that  you  cannot  collect  it  until  July.  The 
debt  on  April  1st  is  not  $1,000,  but  $1,010.  Therefore  we 
have  three  varieties  of  interest:  1,  interest  past  due  and 
unpaid ;  2,  interest  accrued  but  not  due ;  3,  interest  due.  In- 
terest past  due  and  unpaid  may  or  may  not  be  a  good  asset, 
depending  upon  the  length  of  time  it  has  been  unpaid,  and 
the  possibilities  of  collection.  If  on  a  note,  for  instance, 
which  has  been  renewed  from  time  to  time  without  payment 
of  interest,  and  the  interest  is  added  to  the  principal,  it  may 
well  be  eliminated  as  an  asset.  Interest  accrued  is  recog- 
nized in  law  and  accounting  as  a  proper  asset,  and  interest 
due  should,  of  course,  be  collected. 

Therefore,  in  making  up  a  statement  of  condition,  we 
must  add  the  amount  of  interest  earned  at  the  time,  but  un- 
collectible because  the  due  date  has  not  yet  arrived.  In  the 
illustration  above,  the  bond  in  question  would  on  April  1st 
be  an  asset  at  $1,010,  and  not  $1,000,  and  would  sell  at  that 
figure  if  placed  on  the  market,  assuming  bonds  of  that  type 
to  be  selling  at  par.  But  instead  of  setting  up  the  bond  on 
the  statement  at  $1,010,  we  list  at  par  and  hold  the  $10  as 
"interest  accrued." 

There  are  several  ways  in  which  to  account  for  this  item 
in  bank  bookkeeping.  We  may  set  up,  say  on  January  1st, 
an  account  "Accrued  Interest"  and  figure  all  the  interest 
accrued  up  to  that  time  and  hold  it  as  a  book  asset.  As  the 
interest  is  collected,  part  must  be  credited  to  "interest  ac- 
crued" and  part  to  "interest  received."  If  on  a  bond  of 
$1,000  there  was  $10  accrued  interest  on  January  1st,  inter- 
est being  payable  October  and  April  1st,  and  it  was  entered 
on  the  books  as  accrued  on  January  1st,  when  the  interest 
was  collected  in  April,  half  would  go  to  "Accrued  Interest" 
account  and  half  to  "Interest  Received." 

The  foregoing  makes  a  book  entry  of  accrued  interest, 
but  thereafter  each  collection  of  interest  must  be  separated, 
so  that  the  account  is  in  due  course  reduced  to  nothing.  It 
requires  constant  attention  and  cannot  be  recommended  un- 
less carefully  watched. 

The  simpler  way  is  to  figure  the  accrued  interest  at  the 


592  THE  PRACTICAL  WORK  OF  A  BANK 

time  reports  and  estimates  of  earnings  are  made  up  by  the 
following  process :  On  each  block  of  bonds,  enter  the  amount 
of  interest  earned  for  one  day.  Multiply  this  amount  by 
the  number  of  days  between  the  last  due  date  of  interest  on 
the  block  and  the  date  of  the  report.  Thus  the  interest  on  a 
block  of  $10,000  bonds  is  $1.66  a  day.  The  interest  is  pay- 
able April  and  October  1st.  A  report  is  called  for  on  Jan- 
uary 1st.  We  will  have  90  times  $1.66  as  the  accrued  inter- 
est on  this  block.  Each  block  being  figured  for  one  day,  the 
work  of  accruing  the  interest  is  reduced  to  mere  calculation 
of  days  and  multiplying.  Mortgages  may  be  treated  the 
same  way,  and  demand  loans  likewise.  Unless  the  bank 
wants  to  know  the  accrued  interest  daily,  and  employs  the 
help  to  keep  the  records  correct,  the  latter  plan  answers 
every  need. 

We  cannot  work  on  the  theory  that  if  we  receive  $50,000 
interest  yearly,  one-twelfth  is  due  each  month,  for  the  date 
of  the  report  may  be  such  as  to  make  this  estimate  incorrect 
and  misleading.  On  the  other  hand,  we  have  interest  accru- 
ing against  the  bank,  and  due  to  depositors  when  the  period 
shall  have  ended.  Thus  we  take  off  a  statement  on  Novem- 
ber loth,  and  have  $1,000,000  of  savings  accounts,  interest 
at  four  per  cent.,  due  January  1st.  We  must  set  this  up  as 
a  liability.  We  do  this  by  a  close  estimate  based  upon  past 
experiences.  From  our  past  dividends  to  depositors  we 
know  that  the  interest  cost  on  savings  accounts  was  .032  per 
cent.  Multiply  the  amount  due  on  the  date  of  the  report  by 
this  rate  for  the  time  since  the  last  interest  period.  We  have 
thus  taken  into  account  interest  due  to  us  and  due  from  us, 
and  have  shown  our  real  status  in  respect  to  these  hidden, 
yet  real,  assets  and  liabilities. 

No  statement  of  earnings  for  a  period  is  correct  that 
does  not  take  into  consideration  the  income  received  during 
the  period  which  properly  belongs  in  the  preceding  period. 
This  is  best  accomplished  by  making  a  calculation  of  the 
accrued  interest  at  the  close  of  the  period,  so  that  in  figuring 
the  income  for  the  next  period  there  may  be  deducted  the 
income  received  that  was  earned  in  the  period  prior. 

UNEARNED  DISCOUNT 

A  receipt  is  not  necessarily  an  earning,  and  earnings  are, 
as  above  indicated,  not  necessarily  receipts.  Banks  are  con- 


APPENDIX  A  505 

stantly  putting  through  entries  that  appear  as  earnings 
which  are  not  properly  such,  only  part  of  the  amount  being 
earned  during  the  period  under  review.  The  element  of  un- 
earned discount  has  not  heretofore  received  the  attention  of 
the  banks  it  deserves,  and  unless  the  banker  unconsciously 
eliminates  part  of  his  receipts  he  will  be  deceiving  himself. 
As  a  matter  of  fact  many  bankers  make  only  casual  esti- 
mates of  their  earnings,  being  satisfied  to  know  they  have 
made  a  profit  sufficient  to  warrant  a  dividend,  and  take  their 
figures  from  the  books,  which  too  often  do  not  show  the  real 
condition  of  the  bank,  both  as  respects  the  assets  and  the 
liabilities.  For  instance,  we  turn  to  the  earnings  and  find 
interest,  rents,  exchange,  etc.,  amounting  to,  let  us  say, 
$50,000  for  the  year  1918.  As  a  matter  of  fact  part  of  this 
consists  of  interest  earned  during  the  preceding  year  and 
collected  in  1918.  For  example,  the  interest  on  a  block  of 
bonds  was  due  January  1st,  1918 — all  earned  in  1917.  We 
collect  and  credit  January  3,  and  it  appears  as  a  receipt  for 
1918,  whereas  it  belonged  in  the  earning  power  of  1917.  Dis- 
count is  often  a  receipt,  but  not  a  full  earning.  To  illustrate : 
Here  is  a  $1,000  note  discounted  October  1,  1918,  for  four 
months  at  6  per  cent.  The  $20  discount  was  immediately  cred- 
ited as  a  receipt,  and  if  we  are  not  careful  will  be  considered 
an  earning.  The  note  runs  over  into  1919  by  one  month  and 
therefore  three  months'  interest  was  earned  in  1918  and  one 
month's  interest  belongs  in  1919.  We  cannot  separate  such 
matters  in  the  bookkeeping  very  well,  because  it  would  make 
too  many  complications.  We  may  accomplish  the  same  result 
by  setting  up  an  account  that  provides  for  the  elimination 
of  these  unearned  amounts  as  an  offset  to  the  earnings. 

There  are  many  ways  in  which  this  can  be  done,  some 
simple  and  some  complicated.  Large  banks  with  an  active 
discount  department  and  charging  various  rates  of  interest 
on  loans  will  be  obliged  to  establish  a  bookkeeping  system  to 
account  for  these  earnings,  and  employ  clerks  whose  duty  it 
will  be  to  keep  these  records.  But  in  the  average  bank  where 
the  interest  rate  is  uniform  and  the  force  inadequate  to  make 
it  part  of  the  daily  bookkeeping,  a  simpler  method  is  essen- 
tial. The  following  is  as  simple  and  as  efficient  as  can  be 
hoped  for  without  burdening  the  force  with  undue  detail 
work : 

If,  for  instance,  a  report  is  called  for  as  of  January  1st, 

39 


594  THE  PRACTICAL  WORK  OF  A  BANK 

1919,  it  follows  that  the  earnings  up  to  that  point  must  be 
included  and  the  receipts  that  are  not  earnings  must  be 
eliminated.  Therefore  on  every  note  that  has  been  dis- 
counted prior  to  that  time  we  have  taken  more  interest  than 
belongs  in  the  period.  In  the  case  above  mentioned,  we  have 
30  days'  interest  to  deduct.  If  a  note  were  discounted  on 
December  loth  for  30  days,  one-half  belongs  in  the  report 
and  one-half  must  be  taken  out.  We  cannot  afford  to  take 
the  time  and  segregate  the  interest  of  each  note,  nor  is  it 
necessary.  We  may  simply  take  the  maturity  tickler  and 
add  the  amounts  due  each  day  on  paper  discounted  and 
figure  the  amount  of  interest  for  the  time  past  the  date  of 
report.  Thus,  we  find  that  on  January  3  there  were  $10,000 
of  notes  maturing.  We  have  taken  the  interest  on  these  for 
three  days  more  than  we  were  entitled  to  as  of  January  1st. 
On  the  4th  there  are  $25,000  maturing.  These  have  had 
four  days  too  much  interest ;  on  the  other  days,  such  as  Jan- 
uary 30th.  we  have  $34,000,  for  30  days,  and  so  on  until  the 
last  maturity  in  the  book.  Set  down  the  amount  due  each 
day,  with  the  number  of  days  past  the  report  date,  and  take 
the  interest  from  an  interest  table. 

If  more  than  one  rate  of  interest  is  charged,  the  matur- 
ing notes  must,  of  course,  be  separated,  and  it  will  be  well 
for  banks  that  have  different  interest  rates  to  separate  the 
maturing  notes  on  the  maturity  tickler  in  several  columns, 
according  to  the  interest  rates. 

The  foregoing  methods  of  handling  accrued  interest  and 
unearned  discount,  while  they  do  not  show  the  daily  condi- 
tion of  these  two  items  of  the  bank's  bookkeeping,  are  simple 
and  workable,  and  with  little  expenditure  of  time  and  effort 
will  show  the  real  condition  of  the  bank  on  any  given  date. 


INDEX 


Acceptance  Credit   20 

Acceptances    20,22,  485 

Acceptances   Outstanding    318b 

Account,  Charge  395 

Account,  Influences  of 540 

Account,  Opening  60 

Account  Stated  294 

Accounting,  Equation  of 260 

Accounting    Facts,    Presentation 

of     249 

Accounts,  Assigned  a  Menace. . .  411 

Accounts,  Bank 250 

Accounts,  Book,  as  Security 410 

Accounts,  Changes  in 316 

Accounts,  Closed 317 

Accounts,  Controlling  285 

Accounts  in  General  Ledger 286 

Accounts  Payable 455 

Accounts  Receivable  447 

Accounts  Receivable  as  Collateral  237 

Accounts  Stated,  Rendering 296 

Accounts,  Unprofitable  539 

Accrued  Assets  and  Liabilities..  458 

Accrued  Interest   590 

Acid  Test  for  Coins 143 

Administration  of  a  Bank 39 

Administrative  Costs 544 

Agency 129 

Aim  Definite  in  Banking  Career.  509 
Analysis    of    Accounts,    Methods 

of 551 

Analysis       of       Credit       State- 
ments    493-502 

Application  for  Employment 275 

Apportionment  of  Earnings  and 

Expenses    54^ 

Arbitrage    585 

Assets  to  Liabilities,  Ratio  444 

Average  Book   295 

Balance,  Loanable   543 

Balances,     Clearing-House     Set- 
tling       157 

Balances,  Compensating  323 

Balances  Due  to  and  from  Banks, 
Comptroller's     Instructions     to 

Examiners    369,  370 

Balances,  Small,  Penalizing 542 

Bank  and  Correspondents 431 

Bank    and    Depositors'    Relation- 
ship        61 


Bank  as  Credit  Machine 12 

Bank  Balances,  Reconcilement  of  360 

Bank  Connections  (Credit) 457 

Bank,  Country  vs.  City 506 

Bank  Credit,  Forms  of 16 

Bank,  Definition  of  30 

Bank,  Evolution  of  9 

Bank,  Function  of 33,  58 

Bank  Man's  Twenty- four  Hours.   514 

Bank-Note  Credit 17 

Bank  Notes 36 

Bank  Notes,  How  Secured 17 

Bank  of  Discount,  Definition  of . .     31 

Bank  "One-Man"   43 

Bank  Profits    537 

Bank  Statements  by  Machine. .  .3 18d 

Banker  in  Fiction 503 

Banker      Must      Know      Certain 

Things    516 

Banker,    Private   28 

Banking  House 50,  265 

Banking  House,  Comptroller's 
Orders  to  Examiners  Concern- 
ing    368 

Banking,  Machinery  of 77 

Banking  Room 51 

Banking,  Two  Schools  of 504 

Banks,  Affiliated,  Comptroller's 
Instructions  to  Examiners  Con- 
cerning    369 

Banks  Agree  in  Essentials 253 

Banks  Classified   30 

Banks  Distinguished   29 

Banks,  Surplusage  of  40 

Bills,  Foreign,  Demand  for 573 

Bills,  How  to  Strap 70 

Bills  of  Exchange,  Forms  of 

574,  575 

Bills  of  Lading 246 

Bills  Payable  273 

Bills  Receivable 446 

Block  System  81 

Bonds  Borrowed  273 

Bonds,  Securities,  etc.  (in  State- 
ment)    264 

Book  Accounts  as  Security 410 

Bookkeeping  by  Machinery 319 

Bookkeeping  Force 274 

Books,  How  Kept,  Comptroller's 
Questions  Concerning  367 

595 


596 


INDEX 


Books  of  Record 257 

Borrowers  *9 

Borrowers'   Liability    223 

Boston  Ledger  289 

Boston  Ledger,  Merits  of 291 

Bread  and  Butter 512 

Building  and    Loan    Association, 

Definition  of    32 

Business  of  Bank  ,13 

Cables 585 

Call  Loans,  Payment  of  242 

Capital  Assets  4.52 

Capital  Stock  267 

Cash    445 

Cash  Discounts   464 

Cash,  Examination  of  357 

Cash,  How  Stored  and  Kept 93 

Cash  Items   266 

Cash,  Paying  Teller's 93 

Cashier,  Duties  of 45 

Cashier's  Checks  271 

Cashing  a  Check  101 

Certificates  of  Deposit 271 

Certification    113 

Certification  Credit    19 

Certification  of  Checks  19 

Certified  Checks    271 

Characteristics  of  Banks 30 

Charge  Accounts    395 

Charter,  Bank   40 

Charter,  Preliminaries  to  Grant- 
ing    41 

Check,  Cashing   101 

Check,  Cashing  a  "Stop-Payment"  118 

Check,  Dating  Ahead   103 

Check,  Definition  of 322 

Check  Frauds,  Protection  Against  121 

Check,  Journey  of   325 

Check,  Largest  Check  Ever  Paid.  148 

Check,  Undated  103 

Checking  Function  35 

Checks  266 

Checks,    Amount    in    Process    of 

Collection    321 

Checks,  Bearer    112 

Checks,  Care  of   317 

Checks,  Certification    113 

Checks,  Circulating  Currency 820 

Checks,  Classified   329- 

Checks,  Collection  of 330,  328 


Checks,  Corporation    72 

Checks,  Crossed  109 

Checks,  Growing  Use  of 320 

Checks,    How    They    Should    be 

Drawn    101 

Checks  in  Lead  Pencil 112 

Checks,  Protecting  119 

Checks,  Protection  of 116 

Checks,  Raised    101 

Checks,    Raising    117 

Checks,  Safeguarding  120 

City  Correspondents    324 

Classification  of  Banks 30 

Clearing  Country  Checks 162 

Clearing  for  Non-Members 161 

Clearing-House  Activities    160 

Clearing-House     Balances,     Set- 
tling       157 

Clearing-House,  Brief  History  of  147 
Clearing-House    Examinations . . .  363 

Clearing-House  Settlements 159 

Clearing-House    Terms    and    In- 
struments       151 

Clearing-House,  Varieties  of. ...  150 

Clearing-Houses    145 

Clearing  Process   154 

Clearings,  Bank  99 

Clearings,  International    25 

Clerk,  Chief  279 

Coins,  Acid  Test 148 

Collateral  Loans   211 

Collateral      Loans,      not      Credit 

Transactions 386 

Collateral  Loans,  Verification  of.  357 

Collection  Letter 186 

Collections  164 

Collections,  Law  of   168 

Collections,  Machinery  of 188 

Collections,  Out-of-Town    197 

Collections,    Sending     Direct    to 

Drawee  Bank  171 

Commercial  Paper   462 

Commercial    Paper   and    Federal 

Reserve  Banks 466 

Commercial  Paper  as  Reserves . .  464 
Commercial     Paper,     Brief     of 
Merchants  Association  of  New 

York   471 

Commercial   Paper   Broker 478 

Commercial    Paper,    Buying    on 

Option    479 

Commercial   Paper,  Two-Name . .  469 


INDEX 


597 


Common  Denominator  of  Values.  3 

Compensation  in  Banking 503 

Controlling  Accounts    285 

Corporation  Checks  72 

Correspondence,  How  Filed 528 

Cost  Accounting  543 

Cost  of  Handling  Items 504 

Cost  System  Based  on  Expenses.  558 

Cost,  Units  of  549 

Costs,  Administrative   544 

Costs,  Special 545 

Country  Banker  and  City  Corre- 
spondent    324 

Country  Checks,  Clearing  162 

Counterfeits 68 

Coupons  70,  201 

Coupons,  How  Prepared  for  De- 
posit      70 

Credit — a    Fine   Piece   of    Mech- 
anism      375 

Credit  a  Lawful  Right  377 

Credit— a  Science   374 

Credit— A  Transfer  375 

Credit,  Age  of   374 

Credit  an  Asset 378 

Credit  and  Loans 206 

Credit,  Bank,   Clearing  of 24 

Credit,  Bank,  Limits  of  22 

Credit,  Bank,  Rests  Upon  Mercan- 
tile Credit    400 

Credit,  Certification  19 

Credit,  Changing  Conditions  in. .  408 

Credit,  Channels  of  Mercantile. .  402 

Credit,  Commercial,  Benefits  of. .  400 

Credit,  Creation  of   14 

Credit   Department    430 

Credit,  Essentials  in  Granting. . .  371 

Credit   Field,  Mercantile 413 

Credit,  Field  of 372 

Credit,  Frauds  in  415 

Credit  in  Business   372 

Credit  in  Economics   371 

Credit  in  Law  371 

Credit,  Individual  vs.  Mercantile.  393 

Credit  Information 432 

Credit  Information,  How  Kept . .  433 

Credit  Inquiries,  Answering 482 

Credit,  Instruments  of  409 

Credit  is  Ability  379 

Credit  is  Capital   377 

Credit  Is  Confidence 381 

Credit  is  Reputation  879 


Credit  is  Resources   380 

Credit  is  Willingness 379 

Credit  Machine,  Operation  of 15 

Credit  Man  435 

Credit  Man,  Comment  of  on  Loan 

Application    460 

Credit  Man,  Deductions  of 485 

Credit  Man,  Qualities  of  487 

Credit    Man,    Wants    to    Know 

What    462 

Credit  Man's  Tools   487 

Credit,  Mercantile    399 

Credit,   Mercantile,  Granting 422 

Credit,  Personal   387 

Credit,  Personal,  Distinguished..  389 
Credit,   Personal,    Foundation   of 

Credit  System   399 

Credit,  Personal,  Granting  of...  391 

Credit,  Personal,  Growth  of 396 

Credit,  Personal,  Losses  in 398 

Credit,  Personal,  Period  of 397 

Credit,  Psychology  of 382 

Credit  Ratings,  Personal 392 

Credit  Risks  Classified 434 

Credit     Should     Facilitate     Ex- 
changes       402 

Credit,  Sound  Elements  of 437 

Credit  Statement    380 

Credit   Statements,    Standardized 

Forms    440 

Credit  Terms   408 

Credit,  Three  C's  of 491 

Credit,    Use   of   in    International 

Transactions    406 

Credits,  Exchange  of   18 

Crossed  Checks   109 

Customers'  Liability  on  Account 
of  Acceptances   318h 

Dating  Ahead    412 

Days  Off  283 

Debts,  How  Settled  1 

Debts,  Origin  of  Foreign 571 

Debts,  Settling  Without  Cash...  569 

Deductive  Process    490 

Defects    in    Present    System    of 

Checks    321 

Definition  of  Bank  30 

Demand  and  Supply  2 

Deposit  Function   33 

Deposit,  Making  a  69 

Deposit,  Proving 75 

Deposit,  Specific  35 


598 


INDEX 


Deposit  Ticket,  Proving 76 

Deposit  Tickets,  Care  of 317 

Deposits  58 

Deposits  are  Loans   207 

Deposits,  Bank   34 

Deposits,  Competition  for 59 

Deposits,    General    34 

Deposits,  Individual £70 

Deposits,    Individual,    Comptrol- 
ler's Instructions  to  Examiners 

Concerning    370 

Deposits,   Savings 271 

Deposits,  Special 35 

Deposits,  U.  S 271 

Depositors.  Accounts  with 288 

Depositors,  Bank's  Service  to. ...  540 

Depositors,  Borrowers  59 

Depositors,    Educating    How    to 

Draw  Checks   122 

Depreciation  457 

Directors     42 

Directors,  Information  Concern- 
ing Required  by  Comptroller . .  366 

Discount  Function 35 

Discount  Market 475 

Discount   Register    226 

Discount  Unearned   231,  592 

Discounts  and  Loans  Distin- 
guished    35 

Discounts,  Cash  464 

Discounts,  Cash,  Cost  of 465 

Discounts  Distinguished   205 

Distinction  Between  Banks   29 

Dividends   257 

Dividends,  Comptroller's  Instruc- 
tions to  Examiners  Concern- 
ing    369 

Dividends   Unpaid    270 

Domestic  Exchange    587 

Due  Date  193,  230 

Due  from  Federal  Reserve  Bank.  266 

Due  from  National  Banks 265 

Due  from  Reserve  Agents 265 

Due  from  State  Banks,  etc 265 

Due  from  U.  S.  Treasurer 267 

Due  to  Approved  Reserve  Agents  270 

Due  to  National  Banks 269 

Due  to  State  Banks,  Etc 269 

Earning  Power  of  Money 545 

Education  a  Definite  Process..    .  512 


Education,  What  is  511 

Employees,  Information  Required 

by  Comptroller   366 

Employees,  Old  167 

Employment,  Application  for. . . .  275 

Endorsements    183 

Endorsements,  Corporation  74 

Errors,  Psychology  of 353 

Examination,  How  to  Make  an..  355 
Examination,  What  Constitutes  a 

Complete   351 

Examinations,  Bank    349 

Examinations  by  Directors  351 

Examinations,  Classes  of 350 

Examinations,  Clearing-House . . .  363 
Examinations,  Details  of  Required 
by  Comptroller  of  Currency...  366 

Examine,  Right  to 349 

Examiner,  what  he  should  know.  352 

Exchange,  Basis  of 576 

Exchange  Charges  330,  544 

Exchange,  Domestic  587 

Exchange,  Foreign  and  Domestic.  569 

Exchange,  how  quoted 575 

Exchange  Rates,  Causes  Affecting  576 

Exchanges,  Balance  of 319 

Exchanges  for  Clearing-House...  266 

Exchanges,  Verification  of 357 

Expense  Account,  Analyzing. . . .  559 

Expenses    315 

Experience  511 

Exports,  how  financed 580 

Failures,  Causes  of 423 

Filing  System 530 

Fixtures  453 

Force,  The  Bank 274 

Foreign  Exchange 569 

Foreign  Exchange,  Factors  in...  581 

Foreign  Exchange,  Profits  in 584 

Forgery   101 

Fractional  Currency 266 

Functions  of  a  Bank 33 

Furniture    and    Fixtures 265 

General  Ledger 285 

Germany,  Development  of 27 

"Good  Delivery"  219 

Good  WU1 458 

Government   Money   and    Securi- 
ties, Verification  of 360 

Identification    .  .  105 


INDEX 


599 


Imports,  How  Financed 577 

Improvement,  Self 508 

Individual  Ledger 287 

Indorsements    72 

Indorsements,  Third  Party 74 

"Ink  Spots  on  the  Ledger" 46 

Interest 239,  544 

Interest  Accrued 590 

Interest  Statement  238,  240 

Inventory 450 

Item,  Cost  of  Handling  an 564 

Journal  Entries  287 

Journal.  The   258 

Lading,  Bills  of 246 

Law  of  Collections 168 

Ledger,  Boston    289,  290,  292 

Ledger,  General  285 

Ledger,  Individual  287 

Ledger,  Opening 300 

Ledger  Posting  by  Machine. 318a,  318b 

Ledger  Sheets,  Safeguarding 318f 

Legal  Tender  144 

Letters,     Improved    Methods    of 

Folding  : 525 

Liabilities  454 

Liabilities  to  Assets,  Ratio 444 

Liabilities  to  Capital 458 

Liabilities,  Verification  of . . . 361 

Liability,  Borrowers' 223 

Liability  Register  227 

Listed  and  Unlisted  Securities . . .  213 

Loan,  Applying  for 210 

Loan,  Bookkeeping  of 221 

Loan,  Good,  Essentials  of 436 

Loan,  Passing  of 459 

Loaning  for  Bank's  Correspond- 
ents    242 

Loans  and  Credit 206 

Loans  and  Discounts 205,  262 

Loans     and     Discounts     Distin- 
guished   35,  205 

Loans   and    Discounts,    Informa- 
tion    About,     Required     by 

Comptroller   367 

Loans,  Collateral    211 

Loans,  Liquid  909 

Loans,  Time 220 

Loans,  Warehouse  243 

Losses 427 

Losses,  Expected 486 


Machinery,  Bookkeeping  by 318 

Machinery  in  Credit  Statement..  463 
Mail,    How    Handled    in    Large 

Bank    519,  520 

Mail,  Morning 518 

Mail,  Outgoing  523 

Margin  of  Security,  The 215 

Maturity  Record   222 

Medium  of  Exchange 4 

Men,  Available   275 

Men  All  Not  Honest 383 

Men,  Handling   281 

Men,  Two  Better  Than  One 385 

Mental     Processes     in     Granting 

Credit    382 

Merchandise 449 

Messenger   164 

Messengers,    Record    of  .  Collec- 
tions      168 

Methods,  Definite  of  Education..  510 

Mistakes,  Teller's   126 

Money,  Earning  Power  of 545 

Money,  Good  and  Bad 67 

Money,  How  Put  Up 70 

Money,  Paper 8 

Money,  Qualities  of  6 

Money,  Settling  Debts  Without. .  569 

Money  Teller  129 

Money,  What  is  ?  5 

Mortgage  Company,  Definition  of    32 

Net  Worth  457 

New  Accounts,  Allowances  for. . .  302 
New  York,  the  Deposit  Center . .     58 

Non-members,  Clearings  for 161 

Note  Bank  Issues 36 

Note,  Promissory   173 

Note  Teller 194 

Notes,  Circulating   269 

Notes,  National  Bank  266 

Notes,  State  Bank  269 

Notification    193 

Numerical  Transit  System 334 

Officers,  Information  About,  Re- 
quired by  Comptroller 366 

Organization,  Integrity  of 459 

Organization  of  a  Bank 38 

Overdrafts   263 

Overdrafts,   Automatic   Detection 

of   318c 

Overdrafts,    Comptroller's    Regu- 
lations Concerning   368 


600 


INDEX 


Paper  Money  8 

Paper,  Two  Name.  469 

Pass  Books 62 

Pass  Books,  Balancing 312 

Past  Performances  385 

Paying  Teller,  Duties  of 91 

Paying  Teller,  Proverbs  of 141 

Paying  Teller,  Qualifications  of.     89 

Paying  Teller's  Cash  93 

Paying  Teller's  Files  . . 127 

Payment,  Stop  109 

Payroll,  Bank's    125 

Pensions    283 

Personal  Loan  Company 32 

Petty  Cash   316 

"Philip — An  Institution" 56,  57 

Plant  to  Capital 456 

Points,  Pivotal  in  Banker's  Life.  507 

Premium  on  Bonds    264 

Presentation    170 

President 44 

Profits,  Bank 425 

Profitable  Accounts  539 

Proof,  Skeleton   293 

Proof,  Teller's  78 

Property  and  Property  Rights . .  386 

Protest    170 

Proverbs   of   a   Paying   Teller. . .   141 

Qualities  of  Money 6 

Ratio  of  Assets  to  Liabilities . . .  444 

Real  Estate   265 

Receiving  Teller   58 

Receiving     Teller,     Duties     and 

Qualifications    of    64,  66 

Receiving  vs.  Paying  Teller 88,  89 

Receivables   447 

Records,  Bank  Purpose  of 284 

Records,  Corporate    253 

Records,  Paying  Teller's 127 

Receipt,  Trust  451 

Recruit,  new  277 

Redemption    Fund    With    U.    S. 

Treasurer    266 

Rediscounts    273,  483 

Rediscounts,  Comptroller's  In- 
structions to  Examiners  Con- 
cerning    370 

References  in  Personal  Credit...  391 
Reserve,  Comptroller's  Orders  to 

Examiners  Concerning   368 

Reserve,  How  Figured 133 


Reserve  (Money)    266 

Reserve  Requirements   135 

Retailer,  The  429 

Retail  Selling,  Cost  of 414 

Retail  Store,  Development  of 424 

Risk,  Business,  in  Credit 438 

Risk,  Moral,  in  Credit 437 

Risk,  Property,  in  Credit 42?,  438 

Rubber  Stamps   280 

Safe  Deposit  Company  (Defini- 
tion)    32 

Satisfaction,  Self   509 

Savings   Bank  Books    (Collection 

of)    202 

Savings  Bank,  Definition  of 31 

Savings  Deposits  271 

Securities,  Comptrollers  Require- 
ments, Concerning  368 

Signatures,  Classes  of  on  File...  127 

Stamps  Used,  Record  of 527 

Standards,  Credit  430 

Statement,  Analysis  of 261 

Statement,    Borrower's    Estimate 

of  Himself   439 

Statement,  Credit,  Essentials  in . .  492 

Statement,  How  to  Analyze 443 

Statement,  Must  be  Recent 441 

Statement  of  Condition  (ana- 
lyzed)    261 

Statement,  Purpose  of 261 

Statement,  Reciprocal  in  Value. .  442 
Statement,    System     (in    lieu    of 

pass  book)    296 

Statements,  Analysis  of  Actual..  486 

Statements,  Comparison  of 384 

Statements,  False   442 

Statements,  Mercantile   419 

Statements,  Monthly  318f,  318g 

Stationery  and  Supplies 313 

Stock,  Capital   267 

Stock,  Capital,  Comptroller's  In- 
structions to  Examiners  Con- 
cerning    369 

Stock,   Certificate,    Book 255 

Stock  Subscriptions  256 

Stock,  Transfer  of  256 

Stockholder's  Liability    33 

Stop  Payment   109 

Subsidiary  Coin    266 

Substitutions    229 

Supplies 313 

Surplus    268 


INDEX 


601 


Surplus,    Comptroller's     Instruc- 
tions to  Examiners  Concerning  369 

"Tallies"  146 

Taxes,  Reserved  for   273 

Teller,  Day  With 83 

Teller's  Importance  65 

Teller,  Money  129 

Teller,  Paying,  Records  and  Files  125 

Teller's  Mistakes  124 

Teller's  Records  and  Proof 78 

Teller's  Work,  Savings  Bank  and 
Bank  of  Discount  Contrasted..     53 

Tender,  Legal  144 

Test  for  Coins 143 

Three  C's  of  Credit 491 

Ticker  317 

Ticket,  Deposit,  Depositor  Should 

Make   70 

Training  Essential  to  Success . . .  506 
Transacting     Business     Without 

Cash    405 

Transit  Department 326 

Transit    Department    in    Opera- 
tion   .  .  339 


Transit  Letter  196 

Transit  Letter,  Evolution  of 339 

Trial  Balance   308 

Trust,  Basis  of  Credit  System...     13 
Trust  Company,  Definition  of...     32 

Trust  Receipts 451 

Turnover,  How  to  Figure 420 

Two-Name  Paper  469 

Undivided  profits   269 

Unit  System  136 

U.  S.  Bonds  on  Hand 264 

U.  S.  Bonds  to  Secure  Circulation  264 
U.  S.  Bonds  to  Secure  Deposits..  264 

Units  of  Cost 549 

Unsecured  Loans,  Verification  of  359 

Vacations    283 

Vaults    55 

Vice-President  44 

Vouchers,   Care   of 317 

Warehouse  Loans  243 

Weekly  Report,  Clearing-House.  163 

Wholesaler,  The   429 

Words   and    Figures,   Differences 
in,  in  Checks 103 


INDEX   TO   FORMS   AND   ILLUSTRATIONS 


Account,  Stated 294 

Accounts  Closed  251,  317 

Accounts,  New,  Record  of  for 

Credit  Office  297 

Accounts  Opened  251 

Adding  Machine  278,  302,  309 

Addressing  Machine  299 

Advertisements,  Soliciting  the 

Discount  of  Accounts 411 

Analysis  of  Account 541 

Analysis  Sheet  for  Analyzing 

Accounts  546,  550 

Application  for  Employment 276 

Average  Balance  Card 225,  538 

Bank  Bookkeeping  Machine 311 

Banking  Room    (floor  plan)... 52,  54 

Bill  of  Exchange 570 

Bills     Purchased,     List     of     for 

Credit  Department   404 

Bookkeeping  Machine  311 

Boston  Ledger   290,  292 

Cash    23« 

Cash  Book,  Teller's  80 


Cash  Item— "No  Protest" 178 

Cash  Record  92 

Cash  Sheet,  Teller's 78 

Certificate  of  Deposit 270 

Certificate  of  Deposit  Register..  272 

Check  Cancelling  Machine. 318 

Check  Registers  348a,  348b 

Check,  With  Instruction  Slip 172 

Clearing-House  Balance  Sheet. .  158 

Clearing-House  Debit  Ticket 155 

Clearing-House  Delivery  Clerk's 

Statement  156 

Clearing-House  Settling  Clerk's 

Statement  156 

Collateral  Note  218 

Collateral  Note,  Form  of 219 

Collateral  Time  Note 217 

Collection  Letter  185,192,200 

Collection  Letter  (city) 189 

Collection  Letter  (own  paper) . .  186 

Collection  Register 204 

Collection  Tracer  194 

Collections,  Foreign  Exchange...  586 


6UJ 


INDEX 


Correspondence  File   

530,  531,  532,  533,  534 
Correspondence  Transfer  Case. . .  532 

Credit  File 489,  534,  535,  536 

Credit  Inquiry,  Memo  of  Answer 

to    401 

Credit,   Questionaire    Relative   to 

Business     394 

Credit  Statement 486 

Credit  Statement,  Corporation, 

378,  440c 

Credit  Statement,  Farmer 440d 

Credit  Statement,  Firm 376,  440b 

Credit  Statement,  Individuals.373, 440a 
Credit     Statement,     Live     Stock 

Dealer  440d 

Credit  Statement,  Standard  Form 

388,  390 

Debit  Ticket,  Clearing-House 155 

Discount  Register   222,  223 

Draft,  Demand   166 

Draft,  Register  588 

Draft,   Sight — Returned,    Reason 

Checked    180 

Draft,  Time   166 

Draft,  Time— "No  protest" 169 

Draft  With  Bill  of  Lading 183 

Interest  Accrued  233 

Interest  Accrued  Receivable.  .232,  233 

Journal    259 

Journal,  General  Balance 259 

Ledger  Sheet   (Machine) 318a 

Letter  of  Credit  572 

Letter  of  Credit,  Advice 574 

Loan  Department  Proof 224 

Loan  Envelope    216 

Loan  Record  Cards   212,214 

Liability  Book  225 

Mail  Sheet    527 

Mail  Teller,  Proof  Sheet 520 

Monthly  Statement  318e 


New  Account  Record  Card 66 

Note  Returned  Unpaid,  Reason 
Checked  176 

Notice  of  Draft  Left  for  Collec- 
tion    169 

Notice  of  Maturing  Loan 230 

Offering  Sheet  for  Loans 210 

Overdrafts,  Report  of 263 

Pay  Roll  Requisition 90 

Postage,  Record  of 527,  528 

Postage  Used,  Statement  of...527,  528 

Profit  and  Loss  Sheet 236 

Proof  Sheet,  Credit  Clerk 281 

Recall  Notice  on  Note 190 

Sealing  and  Stamping  Machine. .  526 

Shannon  File   533 

Slip  Return  Attached  to  Collec- 
tions    180 

Stamp  Affixing  Machine 524,  526 

Stamps,  Record  of  Used 527 

Statement  to  Depositors .  293,  297,  288 
Statement  to  Depositors  (adding 

machine  form)    303,  318,  318e 

Statements,  Comparison  of  Credit 

416,  417 

Stop  Payment  Notice Ill 

Substitution  Sheet    228 

Teller's  Cash  Book 80 

Teller's  Clearing  Sheet 82 

Terms  on  Which  Deposits  Are 

Received  63 

Time  Draft 165 

Tracer  for  Collections 194 

Transit  Letter  336 

Transit  Letter,  Carbon  Process . .  344 

Transit  Machine  334 

Trial  Balance  308 

Trust  Receipt  578 

Trust  Receipt,  Documents  for 

Warehousing  582 

Typewriter,  Transit  340 

Verification  of  Collateral  Loan . .  244 


INDEX   TO    PROPER   NAMES 


Adder  Machine  Co.. 278,  302,  303,  309 

Addressograph  Co 299 

Agger,  Eugene  E 402 

Aicorn,  Edgar  G 810 

Ailing,  N.  D 75,  279,  2fV. 


American  Bankers'  Association.. 

335,  388,  390 

American  Exchange  National  Bank  173 
American    Institute    of    Banking 
(Preface)    188,506 


INDEX 


603 


Aristotle    4 

Atlanta  Clearing-House  329 

Bank  of  England 9 

Bank  of  France 9 

Bank  of  New  York 37,  148 

Bank  of  the  Manhattan  Co 29 

Bank    of    Woodland,    Woodland, 

Cal 94 

Barrett,  A.  M 154 

Barrett,  A.  R 528 

Bath  National  Bank,  Bath,  N.  Y.    98 

Billman,  Henry  129 

Boston  Clearing-House 147,  328 

Brady,  John  Edson  171 

Buckley,  W.  A 557 

Burns,  William  J 116 

Burroughs  Adding  Machine  Co.. 
309,  318c,  318d,  318e,  318g,  334, 
346.  336, 

Cannon,  James  G 325 

Gary,  H.  M 465 

Central  National  Bank,  St.  Louis  104 

Chapman,   Joseph,  Jr 515 

Chase  National  Bank,  New  York  518 
Chemical    National    Bank,    New 

York  29 

Citizens  Bank  of  Buffalo 

373,  376,  378 

Cleveland  National  Bank 336 

Continental    Bank   &    Trust   Co., 

Shrevesport,  La 217,  230 

Continental  &  Commercial  Na- 
tional Bank,  Chicago 335 

Corn    Exchange    National    Bank, 

Chicago    ..334,339 

Cowlitz    County    Bank,    Kaloma, 

Wash.   178 

Croker-Woolworth  National  Bank    94 
Cummins  Co.,  B.  F 318 

Deposit  National  Bank,  Dubois, 
Pa.  165 

Elliott-Fisher  Co 312,  346 

Ensell,  E.  H 547 

Ernst  &  Ernst 421,  426,  450 

Escher,  Franklin   571,  583,  585 

Eyler,  A.  E 331 

Farmers  Loan  &  Trust  Co 29 

Federal  Title  &  Trust  Co.,  Beaver 
Falls,  Pa .227 


First  National  Bank,  Boston.... 

56,  57,506 
First  National  Bank,  Bristol,  R.  I.  106 

First  National  Bank,  Denver 138 

First    National    Bank,    Los    An- 
geles       138 

First   National   Bank,    Nashville, 

Term 174 

First  National  Bank,  Philadelphia  412 
First  National  Bank,  Springfield, 

Mo 115 

Fourth  National  Bank,  New  York  416 
Fourth     Street     National    Bank, 

Philadelphia    557 

Fowler,  C.  W 88 

Fuller,  Horace  F 69,  83 

Girard  National  Bank 173 

Guaranty  Trust  Co Preface,  63 

126,  135,  155,  156,  158,  169,  180,  194, 
228,  244,  297,  384,  572,  574,  578,  586 

Hagerty  "Mercantile  Credit" 399 

Holden,    Henry   S.,    Veneer    Co., 
Grand  Rapids,  Mich 96 

Inness,  A.  Mitchell 146 

International  Paper  Co 467 

Irving  National  Bank 

75,  90,  108,  138,  186,  189, 
190,  192,  196,  200,  238,  240,  276,  298 

Jefferson,  Howard  M 231 

Jess,  Stoddard   137,  138 

Jones,  E.  W 133 

Kansas  City  Clearing  House . .  162,  329 
Kuhn,  Loeb  &  Co 148,  149 

Lester,  J.  G 329 

London  Clearing-House  147 

MacAvoy,  William  C 243 

MacDonnell,  J.  S 142 

Manufacturers     National     Bank, 

Philadelphia,  Pa 166,  202 

Marine  National  Bank,  Buffalo. 52,  54 
Market  &  Fulton  National  Bank, 

New  York   194,  241 

Martin,  William  McChesney 113 

Merchants'    Association    of   New 

York    471 

Merchants-Manufacturers  Nation- 
al Bank,  Baltimore 550 


604 


INDEX 


Merchants  National  Bank,  Provi- 
dence, R.  1 106 

Moore,  A.  K 520 

Morse  on  Banking 123 

Moxey,  E.  P 351,  353,  354 

National  Automatic  Machine  Co. 

524,  526 
National     Bank     of     Commerce,        ». 

New  York   148,  149 

National  Bank  of  Republic,  Chi- 
cago    342 

National    Bank   of  Schwenkville, 

Pa.   202 

National  City  Bank,  New  York. . 

14,  22,  153,  175,  334 
National  Exchange  Bank,  Roan- 

oke,  Va 78,  82,  111,  287,  293 

National  Paper  Co.,  St.  Louis...  104 
National  Park  Bank,  New  York. 

183,  243 
National  Shawmut  Bank,  Boston  133 

Newfang,  Oscar 445,  451,  456,  459 

New  York  Clearing-House 

145,  148,  162,  183,  184 
New  York  State  Bankers'  Asso- 
ciation    388,  390 

New  York  Stock  Exchange 242 

New  York  Times 

411,  413,  421,  427,  450 

Nichols,  Thomas  B 247 

North  Side  Bank,  Brooklyn 129 

Northwestern      National      Bank, 
Minneapolis,   Minn 515 

Parsons,  D.  F.,  Burr  Oak,  Mich..  181 

Pennsylvania  Railroad    149 

Pillsbury  Flour  Co 467 

Poehler,  Theo,  Mercantile  Co 466 

Produce    Exchange    Bank,    New 
York    247 

Read,  William  A.  &  Co 148 

Reichsbank,  The   9 

ReiM,  Charles  W..  .365 


Remington  Typewriter  Co 346 

Rosendale,  William  M 241 

Ruggles,  Charles  A 328 

Seaboard    National    Bank,    New 

York  188 

Second  National  Bank,  Boston, 

69,  83,  248 

Schoeneck,   Edward   E 339 

Shepherd,  Owen   467 

Skinner,  E.   M 421,  425 

Snyder,  F.  B 412,  452,  455,  483 

Spielberger,  Louis 220 

State  Bank  of  Michigan,  Grand 

Rapids   96 

Stone,    Herbert   E 248 

Talbert,  J.  H 14 

Telling,  Oscar   43 

Third  National  Bank,  Detroit...  102 

Thralls,  Jerome  329 

Todd  &  Co.,  G.  W.  Co 

96,  98,  100,  102,  104,  116 
Trust   &   Deposit   Co.    of   Onon- 
daga,  Syracuse,  N.  Y 83 

Union  Bank  &  Trust  Co.,  Jack- 
son,  Tenn 185,  225,  344 

Union    National    Bank,    Clarks- 
burg, W.  Va 100 

Union  National  Bank,  Pittsburgh  331 

United  Cigar  Stores 422 

U.    S.    National    Bank,    Omaha, 
Neb 303 

Wahl  Adding  Machine  Co.,  Chi- 
cago    340 

Webster,  Daniel  37 

Weitzel,  Law  of  Bank  Deposits . .     35 

Westinghouse  Co 467 

White,  Horace  (Money  and  Bank- 
ing)   1,  2,  5,  7,  8,  14,  31,  36,  37 

Wilson  Bros 421,  425 

Yawman  &  Erbe  Manufacturing 
Co.  .  .  53« 


••iff 

A    001310953    3 


